Inflation on the up as Asia gets back on its feet

Inflation on the up as Asia gets back on its feet

SINGAPORE (Reuters): Inflation in Asia is on the up as regional economies recover from the financial crisis but its tone is relatively muted, posing no significant threat for now, according to a Reuters poll released on Thursday.

Prices are pushing ahead in Hong Kong, Indonesia, the Philippines and South Korea with inflation forecasts showing the greatest upward differential between this year and next.

China looked set to remain in deflationary mode from minus 2.7 percent in 1999 to minus 0.6 in 2000, but analysts polled said prices may have bottomed out and that sharply lower interest rates had stoked an upturn in domestic demand.

The country witnessed its 25th month of deflation in October when official figures showed the benchmark retail price index fell 2.6 percent from the year earlier.

Deflation-struck Hong Kong drew the most optimism over its ability to stage a turnaround with forecasts of minus 3.9 percent this year to plus 0.5 percent next year.

The territory's currency peg to the U.S. dollar had increased Hong Kong's pain throughout the crisis, undermining its recovery as it strived to remain competitive.

But many analysts believed the worst was over and that investor appetite and domestic consumption would pick up into 2000.

David Shairp, chief economist at Paribas Asia Equity, saw Hong Kong importing inflation next year, and said wage inflation would remain low while unemployment stayed at around six percent.

Indonesia was another country likely to see an inflation pick up, with analysts polled anticipating a figure of 2.8 percent for this year and 7.2 percent next. Although the figures remains well below the 77.63 percent number in 1998.

In the Philippines, an expected uptick in consumer prices on the back of stable food prices and the base effect from 1998 were seen as supportive for the headline numbers.

Economists also said higher oil prices and a possible firming in interest rates if the government proved unable to control its widening budget deficit could also be a booster.

"This year's inflation was held down by the recovery in agriculture production," said David Cohen, economist at MMS/S&P.

The specter of possible rate tightening in South Korea was given credence by expectations for 3.5 percent inflation growth in 2000.

South Korea's economy has attracted strong investment attention in recent weeks, with sentiment over stellar domestic stocks likely to continue into 2000.

But risks remain, with many analysts awaiting results of on- going restructuring and the still high rate of non-performing loans.

Inflation forecasts for Australia were modest, with no change anticipated between the 2.6 percent forecast for 1999/00 and 2000/01.