Thursday, March 10, 2011

Is Asian Inflation Heating Up?

From the WSJ:

Inflation concerns in Asia have grown in the past few months, but have focused on rising food costs exacerbated by bad weather and, more recently, higher oil prices amid political tensions in the Middle East.

But unease is now growing around so-called core inflation, which typically excludes volatile elements such as energy and food, and which has also been rising in much of the region.


Thailand on Wednesday raised its benchmark interest rate for the third time in recent months and cited pressure both on overall and core inflation.

And the Bank of Korea said in a report Wednesday that inflation is coming not just from supply shortages but also from the demand side on the back of the country's economic recovery.

Separately, central bank Governor Kim Choong-soo warned the country's inflation may break through the bank's forecast for the first half of the year.

Economists say many Asian countries are now fully recovered from the recent global financial crisis, and as a result are getting back to where they were in 2008, when a long economic expansion was starting to reveal acute shortages of labor, land, infrastructure and factory capacity.

Unemployment has returned to precrisis levels in some Asian countries, with unemployment now below 4% in Malaysia, Thailand, Singapore, Hong Kong and South Korea. Indices measuring utilization of industrial capacity are at or well above historical averages in some countries, and land for farming or new residential development has become increasingly hard to come by.

"There's not much slack left" in Asia, says Robert Subbaraman, an economist at Nomura in Hong Kong. As a result, he says he and his colleagues believe inflation "is going to be long-lasting in Asia."

Yesterday, when I wrote about prices in the latest Beige Book, I noted there were two types of inflation. The first was from commodity price increases, which, in the U.S.' experience are typically absorbed by manufacturers in the form of compressed margins or increased productivity. Something I forgot to mention was that commodity price spikes are typically self-slowing. For example, when oil reaches a certain price level, demand naturally slows, lowering demand and slowing inflation. So raw material price spikes are absorbed by the manufacturing plant.

However, core inflation is different. It comes from a lack of slack in the economy. As the above article notes, when an economy starts humming and has lack of spare capacity (low unemployment, high capacity utilization) prices start to increase. This is the situation the Asian economies now face. In short -- it's a good problem to have.