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[quote=FRANKENSTEIN,294860]Source: FT.

Inflation shocks are challenges for Asia's economies

By Mark Konyn
Thursday, June 12, 2008
                                 
Thelatest sell off at the end of May in Asian markets follows the spectacular recovery in April when investors returned to the region that had previously been battered amidst global concerns of an economic slowdown and mounting inflationary pressure.
It is now the latter that is troubling investors most as a combination of rising oil, food and commodity prices is causing concern that higher inflation will limit economic growth prospects. In the past 15 years Asia outside of Japan has been susceptible to inflation shocks that have hurt the region's competitiveness and undermined central bank credibility.
                                  
For some time, analysts have been tracking food prices in China as a lead indicator of future wage inflation. In the past 10 years of accelerated growth in mainland China, droves of workers have left rural areas to work in cities and factories. As a result of both this labour migration and the under-investment in the agricultural sector, farming productivity has not improved. Higher living standards are now placing a  heavier demand on food supply and as a result there has been a steady increase in food prices that has fed through directly to wages and prices more generally.

The authorities have been early to recognise this potential threat to sustainable economic growth and have sought to cool the economy through a combination of monetary and administrative measures targeting specific parts of the economy, most noticeably credit growth in the housing market. In other parts of the region, rising commodity and oil prices are testing central banks' ability to take the initiative.

For example, in Indonesia the central bank has acted early to raise interest rates, recognising that the removal of oil subsidies will be inflationary. In the previous cycle the inability of the central bank to demonstrate a measured and considered approach in managing the impact of subsidy changes cost the authority significant credibility with international investors. It seems this time around previous lessons have been learnt and investors are now pricing in an expectation of further interest rate hikes. The so-called frontier economy of Vietnam is also feeling the strain and the central bank has recently raised interest rates substantially to 12 per cent. It seems that once again last year's frontier market is this year's biggest challenge as international investors have been hurt in the downturn - Japanese investors were big buyers of Vietnam in 2007. Inflation is not being viewed negatively by economists and analysts in all parts of the region. 
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