HONG KONG (Dow Jones)–While the West still worries about the ravages of deflation, emerging markets in Asia are beginning to contemplate what to do about the opposite problem: inflation.
New figures released Thursday from South Korea, Indonesia and India all show prices increasing, a sign those economies have turned the corner and beaten deflationary pressures for now. It also confirms the likelihood that those countries will be among the first to raise interest rates as soon as later this year.
After a larger-than-expected increase in wholesale prices Thursday, India’s finance minister Pranab Mukherjee warned “there is inflationary potentiality and inflation may go up further.”
“When it goes up it is a matter of concern,” he said.
Economists say there is little near-term worry of inflation getting out of control quickly. The global economic rebound is still fragile and commodity prices have leveled off as China’s reported stockpiling of industrial metals and oil has waned.
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But the latest data confirm that Asian central bankers have to start thinking about applying the brakes to prevent economies from overheating. Interest rates in most countries are at record-low levels and need to rise sharply to get back to levels associated with average growth rates.
“Clearly the period of falling inflation is over for emerging markets,” says UBS economist Jonathan Anderson. “We are at the inflection point.” UBS expects the healthier Asian economies to begin to raise rates early next year.
South Korea reported monthly consumer prices in September rose 0.1% from August, a bit lower than expected but still 2.2% above a year ago. Indonesian consumer prices rose faster than economists expected at 2.83% in September compared to the year earlier period.
India’s weekly wholesale price index, its main gauge of inflation, rose 0.83% from a year earlier, according to provisional data issued Thursday by the Ministry of Commerce and Industry. The annual inflation rate is steadily inching up after 13 successive weeks of yearly declines in wholesale prices.
Thailand said Thursday its consumer price index fell for the ninth straight month in September, down 1% from the year earlier. But prices rose 0.2% from August levels.
Year-on-year inflation figures, still negative in places like Thailand and China, will rise in coming months thanks to the “base effect.” It was a year ago that energy and commodity prices began their rapid fall, lowering the base level of prices that are used to measure yearly inflation.
Economists see these latest price reports as proof that emerging markets, especially in Asia, are the first economies to recover from the worldwide downturn.
“It’s consistent with Asia leading the world out of the recession. We’ll need to be the first to begin to normalize rates,” says Robert Subbaraman, Nomura’s chief economist for Asia outside Japan. “It’s a tough job being an Asian central banker right now,” he says. He expects South Korea to be the first to raise rates in November, followed by other Asian economies early next year.
The Bank of Korea has among the hardest decisions on when to raise rates. Recent economic data show the South Korean economy has closed much of its output gap, increasing the likelihood of inflation. But the country is still shaken by the plunge its export-dependent economy felt earlier this year.
Some central bankers have already used other tools to encourage tightening in the face of a rapid increase of asset prices such as real estate and stocks. Hong Kong authorities have tried to cool the housing market by warning banks not to compete too fiercely on mortgage rates. Singapore restricted a key financing method for real estate developers. And South Korea has raised lending requirements for home loans.
-By Alex Frangos, The Wall Street Journal
