Wacharaphan Tanaprakob

ASIAN ECONOMIES have evidently bounced back from the global recession. However, on the back of strong growth, inflationary pressure has been rising in many countries, shifting the balance of risk from growth to inflation.

Inflation in China has reached 4.9 per cent, the highest level since August 2008. Inflation in India, Indonesia, South Korea, Singapore and Thailand has climbed at a faster rate than normal. Most of the recent rise in prices is attributable to soaring commodities, especially food and oil prices. The Food and Agriculture Organisation's (FAO) food price index has exceeded the level seen during the world food crisis in 2008, and recorded a new high. This prompted the latest meeting by the Group of 20 nations to make the issue of food security its top priority for 2011.

Accelerating food prices have been a result of supply shock due to unusual weather conditions in 2010 and fast growing demand from emerging markets.

Although food prices are expected to moderate in the second half of this year, the current historically high level has already pushed many people into poverty.

Street rallies in Delhi have become more common as a result of skyrocketing and volatile food prices.

In addition to soaring food prices, oil prices have increased since December 2010 and will likely rise further depending on how far the unrest in the Middle East spreads, hence hitting global oil production.

In response, governments in many Asian countries have started to adopt various measures to slow the pace of inflation, ranging from delaying plans to reduce oil price subsidies in Malaysia and Indonesia, offering rebates and tax cuts in Singapore, and providing subsidies on electricity bills in Hong Kong and Thailand.

Why do we have to be highly vigilant on food and oil price developments?

The main reason lies in the fact that the majority of people spend a big chunk of their income to fill their plates and gas tanks as food and energy account for as much as 40 per cent of the consumption basket in Asia.

The eminent risks are that rising commodity prices can pass through to prices of other products.

Initially, the rise in commodity prices will lead to an increase in raw material costs, causing output costs to go up followed by retail prices. When consumers have to bear higher costs of living, they will demand higher paychecks and expect prices to rise even further.
The rise in labour costs will push companies to augment retail prices again. On top of that, the main concern in Asia is that the process will possibly be swift because several Asian econo-mies are currently growing at a level close to full capacity. Besides, in some countries including Thailand, continued expansionary fiscal policy can also put additional pressure on inflation.

That said, it is crucial for Asian monetary authorities to harness elevating inflation before the situation becomes more difficult to keep in check.

The opinions expressed in this article are the author’s own and do not necessarily reflect the official opinion of the Bank of Thailand.