The long years of dormant inflation in Asia are over, but mounting price pressures are unlikely to trigger a mad dash by regional central banks to jack up interest rates, even though oil is scaling 13-year peaks.
With fears of a slowdown in China already bringing commodity prices off the boil, economists expect Asian policy makers to take their cue from the Federal Reserve, which this week promised to nudge up super-low US interest rates at a measured pace.
Thailand, the Philippines and Indonesia have all reported surprisingly strong consumer price inflation this week, and South Korea on Thursday said producer price inflation had accelerated to 5.5 percent in the year through April, the fastest clip since 1998.
But economists for the most part remain relaxed about the price jumps, which they say mainly reflect rises in food and imported energy and raw materials. With plenty of slack in Asia's economies, the home-grown sources of inflation that give central bankers sleepless nights remain largely under wraps.
"Most of what you've seen in Asia is cost-push rather than demand-pull inflation, and my hunch is that that is not going to last now that commodity prices are going south," said Dominique Dwor-Frecaut, an economist with Barclays Capital in Singapore.
Asian economies were still operating below potential, she said, while incomplete bank and corporate restructuring meant easy monetary policy was not translating into enough credit and demand growth to fuel inflation.
"Even if you have loose domestic interest rates, credit conditions can be quite tight," Dwor-Frecaut said. "The banks are not expanding credit because there hasn't been enough restructuring in the corporate sector."
Christa Janjic of UBS in Singapore said Thailand was a good example of how fierce competition is preventing producers from passing higher raw material costs along to consumers.
Thailand's headline inflation rate in the year to April was 2.5 percent, the fastest clip in almost three years. But if higher food and energy prices are stripped out, the core inflation rate was just 0.2 percent higher than a year earlier.
Even though commodity prices were now off their peaks, Janjic said core inflation was likely to creep up, leading the central bank to shift its benchmark repo rate from just 1.25 percent to a more normal, higher rate.
"Capacity utilisation rates of 80 percent imply that there's going to be a bit more pricing power eventually," she said.
Economists say the Philippines and Indonesia, the two most vulnerable economies in Asia, might also have to tighten policy to prevent a pick-up in inflation from weakening their currencies, which would add to the cost of servicing heavy foreign debts.
Dearer food has been the main driver of inflation in both countries. But the IMF's representative in Jakarta, David Nellor, expressed concern on Thursday about the inflationary impact of the weakening Indonesian rupiah. "The central bank will have to watch inflation carefully," Nellor told Reuters.
The case against the continuation of generally benign inflation in Asia can be summed up in two words: China and oil.
In China, prices were just three percent higher in March than a year earlier. But new statistical modelling by Stefan Gerlach and Matthew Yiu of the Hong Kong Monetary Authority suggests that underlying inflationary momentum is much greater.
They said in a paper that inflation has increased rapidly since July 2003 and that the annualised month-on-month rate of change, seasonally adjusted, is now well over 10 percent.
Oil, in Asia, has been the dog that didn't bark. Its high price has not so far affected inflation much because energy costs are a small part of the CPI in many countries. Economic growth has not suffered, either, because strong export demand has so far offset the drag that dearer oil imposes on national incomes.
But with US light crude approaching $40 a barrel and China's economy poised to slow, the dog is starting to growl.
"We're starting to see signs of inflation picking up, and it's partly due to oil," said Rob Subbaraman of Lehman Brothers in Tokyo.
Still, he said central banks would be slow to pull the interest rate trigger, not least because Beijing seemed determined to apply the brakes to an economy whose imports from the rest of Asia were up by around 40 percent in 2003.
"Central banks around the region are going to be very hesitant in actually raising rates even if the Fed moves and if inflation continues to creep higher because of the concern that China could suffer a hard landing," Subbaraman said.
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