Friday, January 10, 2014, 08:17
Asia Weekly: Getting inflation balance right

Central banks must create policies to deliver moderate rises that will encourage steady growth

Asia Weekly: Getting inflation balance right

The ghost of inflation is likely to provide some sleepless nights for the chiefs of central banks in many Asia countries this year, if recently released data and statements are to be believed.

Raghuram Rajan, governor of the Reserve Bank of India, said recently that high inflation is limiting the central bank’s ability to boost growth. “The challenges of containing inflationary pressures limit what monetary policy can do,” Rajan said in his foreword to the half yearly Financial Stability Report released in December.

The Indian central bank has increased its key rates twice in the last three monetary policy reviews, citing concerns about high inflation.

In China, however, inflation was kept within official targets and experts believe that it will be same in 2014. It is considered that the mild inflationary environment might give room for implementing long-awaited financial reforms while still trying to keep growth momentum up.

“For the short-term inflation, the central banks have to tighten their monetary policy,” says Alan Siu, associate dean at the Faculty of Business and Economics at the University of Hong Kong. “It is also pertinent to increase productivity and maintain work efficiency to restrain inflation blast.”

FocusEconomics, a leading provider of economic consensus forecasts, expects that inflation in China in 2014 will be 3.1 percent. And in a recently released report, China’s price monitoring center at the National Development and Reform Commission forecast that inflation in 2014 will be slightly higher than in 2013.

Data released in November show that both China’s manufacturing activity and service activity were resilient. Inflation in China will speed up in 2014 as food prices, wages and rents increase, the price monitoring center indicated.

The center forecast that food prices will continue to show upward momentum this year and lift the overall inflation level by between 0.2 and 0.5 percentage points. The consumer price index (CPI) jumped unexpectedly in October 2013, increasing 3.2 percent after several months of moderate gains. In the first 10 months of the year, the CPI was up 2.6 percent, well below the government’s target of 3.5 percent.

“Since inflation affects consumption and investment patterns, high inflation can considerably affect the growth prospects of Asia economies,” says Thillai Rajan A, associate professor at the Department of Management Studies at the Indian Institute of Technology Madras. “Increased private sector investments, with a gradual tapering of government deficit funding, would be the growth prescription.”

Gradual gains

The Bank of Thailand projects that inflation will be 2.6 percent in 2014. However, in 2013 annual headline inflation rose from 1.5 percent in October to 1.9 percent in November. In addition, annual core inflation rose from 0.7 percent in October to 0.9 percent in November. Core inflation is still within the central bank’s target range of 0.5 to 3 percent.

According to the Monetary Authority of Singapore, core inflation is anticipated to rise from between 1.5 and 2 percent in 2013 to between 2 and 3 percent in 2014, while CPI-all items inflation is projected to be 2.5 to 3 percent in 2013 and 2 to 3 percent in 2014.

In Taiwan, FocusEconomics expects inflation to increase to 1.7 percent in 2014.

“Taiwan’s core CPI has been kept under 2 percent in 2013. Nevertheless, we can still find pricing fluctuation caused by higher importation costs of energy, raw materials and food stocks. In raw estimation, it has caused about a 15 percent rise in production costs for small businesses,” Tristan Liu, director of the Regional Development Research Center at the Taiwan Institute of Economic Research, tells China Daily Asia Weekly.

However, in South Korea, CPI inflation was at the 1 percent level throughout 2013, which was low compared to the long-term average of 3 percent and the central bank’s target range of 2.5 to 3.5 percent. But various reports indicate that inflation will average 2.5 percent in 2014.

“Moderate and reasonable inflation is a prerequisite for economic growth,” says Paul Joseph, a market expert and former principal adviser at the Planning Commission of India. “Inflation is the price that you pay for growth. However, it should not be allowed to go beyond the expected limits as it will make the poor suffer more when it goes up.”

According to a recent survey conducted by the Associated Chambers of Commerce and Industry of India, soaring inflation, high fuel costs, and the rising cost of education and health insurance have eroded the real incomes of middle-class Indian families, with household savings rates dropping by a staggering 40 percent in the last three years.

Indonesia’s story is no different from India’s, as the country continues to battle soaring inflation and a slump in the rupiah’s value.

Its central bank, Bank Indonesia, has said in a communique released towards the end of last year that it will continue to strengthen coordination with the government, especially on controlling inflation. The bank has set a goal of keeping inflation in the range of 3.5 to 5.5 percent in 2014.

Target missed

Inflation in 2013, however, was almost double the 2012 rate of 4.3 percent and well above the central bank’s usual target range of 3.5 to 5.5 percent. Prices in 2013 rose 8.38 percent year-on-year in December, up from 8.37 percent in November. And the rupiah lost 20 percent of its value against the US dollar in 2013.

“Money supply pushes inflation up,” says Zhu Shenghao, assistant professor at the Department of Economics at the National University of Singapore. “So it is absolutely necessary for central banks to anchor inflation by hiking interest rates.”

Nevertheless, in the Philippines the deadly Typhoon Haiyan has pushed inflation to fearful heights. The central bank recently cited the typhoon’s effects on food prices as the main culprit for the surge in inflation.

The storm devastated one of the country’s key agricultural regions, leading to higher food prices, which seem likely to remain high.

“Another aspect of inflation is that people tend to reduce savings and increase their consumption,” says S Prahalathan, chief general manager of the research and analysis group at the Export-Import Bank of India. “To counter that, there is a need to increase the interest rates. However, this will increase the cost of borrowings for the industry, which will be detrimental to growth prospects.”

Recent surveys also point out that inflation will take away a major share of salary increase in 2014.

ECA International, a provider of information and technology for the management of employees around the world, said in a report that employees in the Chinese mainland look set to experience a salary increase of 8 percent in 2014. But after inflation offset, Chinese will see only a 5 percent rise in real terms.

The report said employees in India can expect to see their salaries increase by an average of 11 percent. After factoring in inflation, the rise would be just 2 percent.

In Singapore, nominal pay hikes are likely to average 4.5 percent in 2014, according to a survey by Towers Watson, a human resources firm. This equates to a real pay increase of 1.8 percent, after inflation.

Asian Development Bank’s December 2013 outlook said that average inflation in developing Asia would remain at 3.6 percent in 2013 and 3.7 percent in 2014.

“But subregional contributions change,” it said. “In South Asia, inflation continues to be problematic. Inflation in the Pacific is expected to reach 6.4 percent in 2014, higher than earlier projected.”

 “Inflation is a jag on growth, and improving supply bottlenecks is the long-term solution for the Asian economies,” says Rajat Kathuria, director and chief executive at Indian Council for Research on International Economic Relations.

Kathuria says authorities need to strike a balance between growth and inflation. “Policymaking is an art,” he sums up.


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