Why is inflation relatively low in some places?

Fhit with public uproar over the cost of living, politicians like to point out that rising prices are a worldwide phenomenon. “Every country in the world is getting a big bite out of this inflation,” President Joe Biden said on June 10, after the United States reported its biggest bite since 1981 (consumer prices rose 8.6% in May compared to the previous year). .

It is true that the cost of fuel, fertilizer, grain and other basic products increased everywhere after Russia invaded Ukraine in February. But not everywhere has a mouth full of inflation. Of the 42 large economies that appear on the indicators page of The Economist, eight still have inflation below 4%. Six of those eight are in East or Southeast Asia (see chart). The region also includes some smaller oases of price stability, such as Vietnam (where inflation was 2.9% in the year to May) and Macau (1.1% in the year to April).

What explains this oriental exceptionalism? Part of the explanation lies in the spread of two diseases. An outbreak of African swine fever from 2018 to 2021 devastated the pig population in China, where as many as 200 million pigs were culled, according to some estimates. This dramatically increased the price of pork, a staple food in East Asia. Subsequently, the price has fallen sharply again. In mainland China, for example, the price of pork fell more than 21% in the year to May. This helped offset inflationary pressures in other parts of the economy. (It also helps that East Asia, unlike other parts of the world, eats more rice than wheat. The price of rice is up 8% since the Russian invasion of Ukraine, while wheat prices are up 17% ).

The other anti-inflationary disease in the region is covid-19. Many parts of Asia came to live with the virus more slowly and reluctantly than in the West. Indonesia, for example, did not completely abandon the quarantine for international arrivals until March 22. In Malaysia, travel and movement did not return to normal until early May, a full month after the country officially entered its “transition to endemic” phase, according to an index of social restrictions compiled by Goldman Sachs. . Taiwan remains cautious even now. Its success in keeping covid at bay in the past has left its population with little natural immunity and less Western fatalism about the disease.

China, of course, continues to impose strict restrictions on the movement and gathering of people wherever infections appear. Recent lockdowns in Shanghai and elsewhere have hampered both the economy’s ability to supply goods and its consumers’ willingness to buy them. This double disruption of supply and demand could, in theory, move prices in either direction. But the damage to consumer spending appears to be more severe and persistent. In May, the second month of the Shanghai lockdown, retail sales fell nearly 10% (in real terms) compared to a year earlier, even as industrial production rose 0.7%.

The limits on cross-border travel have been devastating to the economies of Hong Kong and especially Macau, which relies on visitors from the mainland to fill its casinos. Indeed, Macau gdp in the first three months of this year it was less than half the size it reached in the same months of 2019. In that context, an inflation of 1% does not seem so miraculous. In fact, it is a miracle that prices are going up.

In the West, high inflation has forced many economic politicians to become aggressive. The US Federal Reserve, for example, felt compelled to raise interest rates by 0.75 percentage point on June 15, faster than expected. The Fed’s new rush to fight inflation is complicating East Asia’s fight against the same enemy. Higher interest rates in the United States attract global capital inflows, putting downward pressure on Asian currencies. Hong Kong, which has pegged its currency to the US dollar, and Macau, which has pegged its currency to Hong Kong’s, were forced to raise interest rates the day after the Fed did. Malaysia and Taiwan have also raised interest rates this year and Indonesia, where interest rates are 3.5%, is expected to raise them next month, according to bank JPMorgan Chase.

Malaysia and Indonesia have also experimented with a less orthodox response to rising prices: export bans. Indonesia briefly banned the sale of palm oil abroad and Malaysia maintains an export ban on live chickens. The goal is to reserve the entire supply of the country for its own people. But the policies can backfire if lower prices cause local farmers to cut production. Such bans also exacerbate inflation in other parts of the region. Singapore, in particular, relies on poultry imports from its larger neighbor. The economic intimacy and the rivalry of the couple are coming home.

An exception to this restrictive trend is Japan. At its meeting on June 17, the Bank of Japan reiterated its commitment to buy as many 10-year government bonds as needed to keep their yields below 0.25%. It resolved to stick to this ceiling, even as US equivalent yields have risen sharply to more than 3.2%. This yield gap has contributed to the decline of the yen, which has fallen to its lowest levels against the dollar since 1998.

A weak yen will push up import prices, which will contribute to inflation in Japan. If higher inflation persists, people will come to expect it, demanding more generous wages in compensation. Those higher wages, in turn, will drive up prices, making inflation expectations self-fulfilling.

In many parts of Asia, such a spiral of wages and prices is something to be feared. But in Japan, it is something that politicians have long sought. After years of weak demand and falling prices, inflation expectations had turned dangerously low, making it difficult for the Bank of Japan to revive the economy in a recession and prevent it from slipping back into deflation. Like everywhere, Japan is getting a bit of inflation. Their central bankers want to sink their teeth even deeper.

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