Asia battles with surging food costs
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Several nights a week, Reema Kapoor visits her local street market in Goregaon, an outer suburb of Mumbai, on her way home from work to buy the ingredients for her evening meal.
Lately, that routine has been disrupted by rises in the prices of vegetables and other ingredients. Ms Kapoor, like millions of Indian shoppers, had grown to expect a seasonal slump in prices in a country short on cold storage as food keeps better in winter. But “prices are not coming down, they’re just going up”, she says.
Asian consumers are confronting the fact that “food inflation has moved from being cyclical to being driven by structural factors”, says Glenn Maguire, Asia economist at Société Générale.
Others highlight flaws in the Asian agricultural sector that risk reducing productivity and fuelling inflation. Chetan Ahya, economist at Morgan Stanley, says the average growth in India’s agricultural output over the past five years has lagged behind population growth.
With food representing as much as 46 per cent of headline consumer price inflation in countries such as India and the Philippines, Bank of America says that, as long as food prices remain at current highs, “we doubt that these [inflationary] pressures will substantially ease even if crude oil prices come off from hefty levels”. As a result, the priority for many governments has become preventing higher prices from triggering unrest.
In China, the government on Wednesday added to a raft of measures intended to battle inflation by saying it would intervene in the market to curb recent price rises in basic necessities.
But China is not alone. Gloria Macapagal Arroyo, the Philippines president, this week cut an oil import tariff to appease transport workers threatening a strike. In Vietnam, where inflation hit 12.6 per cent last month, bouts of strikes have become common as workers struggle to make ends meet .
For central bankers, balancing deflation and inflation risks “will be much trickier in 2008 than it was in 2007”, HSBC economists said this week. “Concerns about inflation may make it increasingly difficult for Asian central banks to maintain the easy monetary policy stance that has thus far supported domestic demand growth in the region.”
The Asian Development Bank estimates high oil prices will add a full percentage point to the region’s inflation this year, with the brunt borne by India, Indonesia, Malaysia, the Philippines, Singapore and Thailand.
Some economists reject the argument that freak weather has become structural. There are also signs the effects can be digested by economies. In Taiwan, for example, inflation has eased for the past two months from a 13-year high in October after a typhoon destroyed crops.
But the bigger issue remains how far a US-led slowdown in western economies could stifle Asia’s economic development and rising inflation. For regional economists such as Duncan Wooldridge at UBS, 2008 could end up being a game of two halves, with inflation easing later in the year amid a global slowdown. “The bad news is that this is all predicated on weaker economic growth,’’ he says.
Additional reporting by John Burton in Singapore, John Aglionby in Jakarta and Amy Kazmin in Bangkok
China’s battle with inflation, which has soared to 11-year highs on the back of surging pork prices, has drawn the most attention until now. But what Ms Kapoor is seeing in Mumbai is being repeated across Asia as higher food prices and oil at $100 (£51) a barrel combine to present a crucial test of the ability of politicians and central bankers to manage inflation.
Asian consumers are confronting the fact that “food inflation has moved from being cyclical to being driven by structural factors”, says Glenn Maguire, Asia economist at Société Générale.
Among those factors, Mr Maguire says, is the shift in what used to be freak weather events to regular occurrences affecting crops, the westernisation of Asian eating habits, and stronger biofuel demand that has more than doubled the price of palm oil, a key cooking ingredient, in the past 18 months.Vietnam faces strikes as prices threaten gains
In Communist-ruled Vietnam, the workers are growing increasingly restive, writes Amy Kazmin in Bangkok.
At a Taiwanese-owned shirt factory near business capital Ho Chi Minh City, 2,000 workers went on strike recently to protest over a wage of $67 (£34) a month that they say is not keeping up with inflation.
So too did 1,400 workers at a South Korean-owned textile plant, and 1,200 at a foreign-owned shoe factory, where a strike led to a $9.30 a month wage rise.
Inflation, which hit 12.6 per cent last month, has emerged as one of the biggest challenges facing Vietnam, threatening both national competitiveness and the country’s gains on reducing poverty. Foreign direct investment, other foreign inflows and rising food and oil prices have all helped fuel inflation.
But a big factor has been a 37 per cent surge last year in bank lending, particularly by state banks, that the government has been loath to rein in.
“The government is very keen to reach its growth targets and reluctant to trade off growth for dampening inflation,” says Jonathan Pincus, chief economist for the United Nations Development Program in Hanoi.
Hanoi has tried to curb credit growth through administrative orders. But Mr Pincus says Hanoi’s reliance on this, rather than any hike in interest rates, may not be sufficient.
Others highlight flaws in the Asian agricultural sector that risk reducing productivity and fuelling inflation. Chetan Ahya, economist at Morgan Stanley, says the average growth in India’s agricultural output over the past five years has lagged behind population growth.
With food representing as much as 46 per cent of headline consumer price inflation in countries such as India and the Philippines, Bank of America says that, as long as food prices remain at current highs, “we doubt that these [inflationary] pressures will substantially ease even if crude oil prices come off from hefty levels”. As a result, the priority for many governments has become preventing higher prices from triggering unrest.
In China, the government on Wednesday added to a raft of measures intended to battle inflation by saying it would intervene in the market to curb recent price rises in basic necessities.
But China is not alone. Gloria Macapagal Arroyo, the Philippines president, this week cut an oil import tariff to appease transport workers threatening a strike. In Vietnam, where inflation hit 12.6 per cent last month, bouts of strikes have become common as workers struggle to make ends meet .
For central bankers, balancing deflation and inflation risks “will be much trickier in 2008 than it was in 2007”, HSBC economists said this week. “Concerns about inflation may make it increasingly difficult for Asian central banks to maintain the easy monetary policy stance that has thus far supported domestic demand growth in the region.”
The Asian Development Bank estimates high oil prices will add a full percentage point to the region’s inflation this year, with the brunt borne by India, Indonesia, Malaysia, the Philippines, Singapore and Thailand.
Some economists reject the argument that freak weather has become structural. There are also signs the effects can be digested by economies. In Taiwan, for example, inflation has eased for the past two months from a 13-year high in October after a typhoon destroyed crops.
But the bigger issue remains how far a US-led slowdown in western economies could stifle Asia’s economic development and rising inflation. For regional economists such as Duncan Wooldridge at UBS, 2008 could end up being a game of two halves, with inflation easing later in the year amid a global slowdown. “The bad news is that this is all predicated on weaker economic growth,’’ he says.
Additional reporting by John Burton in Singapore, John Aglionby in Jakarta and Amy Kazmin in Bangkok
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