24 Jun 2014
Inflating Asia: Supply side pressures set to trouble Southeast Asian states
Inflation is rising in Southeast Asia. Thailand, Indonesia and the Philippines have all released inflation figures for May and all recorded upside surprises – perhaps a portent of a more generalised inflation dynamic to emerge over the second half of the year. Producer price inflation, the traditional leading indicator of headline inflation, has clearly turned up over the past year. In the case of economies such as Indonesia the pick-up has been quite marked.
Southeast Asian PPIs have throughed
Why is inflation in Southeast Asia picking up at both a fast pace and at a relatively lower growth level than has historically been the case?
- First, lower potential growth in Asia and constrained supply-side dynamics. In particular, the increasing price of energy for the region.
- Second, higher input costs as factors of production shift to new ASEAN markets.
- Third, the risk of El-Nino-led drought, reducing the supply of agriculture and consequently increasing its price.
- Fourth, margin expansion and rapid price increases pass through given a lean inventory environment.
To deal with the supply-side constraints, government spending will be unleashed to support growth in India and Thailand as public-works programs are fast tracked. But much needed subsidy reform in Indonesia (energy and food subsidies account for nearly a third of Indonesia’s budget outlays) could see fiscal policy more clearly supress Indonesian growth as subsidy reform is implemented by a new President in the second half of 2014.
One of the key implications of much needed subsidy reform will be higher inflation.
But the Southeast Asian predicament is in stark contrast to the position of Japan where quantitative easing may need to be increased in order to meet inflation targets for the year.
This is an edited excerpt from the ‘Growth quells, inflation swells’, ANZ Research Quarterly, Q3 2014. The full article is available on ANZ Live.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.