AS core inflation in Asia-Pacific is not as high as in the US and Europe, some Asia-Pacific countries may not need to closely follow the US Federal Reserve’s tightening cycle.
“Rising core inflation in key economies distinguishes this episode from previous energy/commodity spikes, and is what’s prodding central banks to rapidly lift rates,” S&P Global Ratings’ Asia-Pacific chief economist Louis Kuijs pointed out in a recent report entitled Asia-Pacific: Varying Core Inflation Paths Drive Monetary Policy Divergence.
While energy and commodity price hikes have been important in kickstarting inflation globally, it is core inflation that is crucial for inflation prospects in the coming 18 months, according to the international rating agency.
Core inflation – the gauge of underlying inflation pressure excluding volatile energy and food prices – is also key for monetary policy.
In most Asia-Pacific economies, core inflation is lower than in the US largely because of different demand-supply conditions. This is the main reason why most economies in the region have lower headline inflation than in the US
“This variance has important implications for monetary policy prospects and, possibly, currencies. The weighted average of headline CPI inflation in the 14 economies we cover in the region reached 3.9% in mid-2022 from 2.5% as of end-2021 as compared to 9.1% in the US,” observed Kujis in the report that does not constitute a rating action.
“Diverging monetary policy could spur capital outflows and currency depreciation although relatively good prospects should dampen such pressures.”
As illustrated by the sharp depreciation of the Japanese yen this year, S&P cautioned that such divergence could lead to more pressure for capital outflows and currency depreciation.
Nonetheless, good growth prospects and a comparatively large proportion of equity-based capital flows relative to bond flows should dampen such pressure in several other regional economies. Moreover, relatively rapid growth has helped attract foreign capital to the Asia-Pacific region in recent decades.
Major economic impact from the COVID-19 pandemic has weakened the region’s relative performance in recent years. “But we forecast Asia-Pacific GDP (gross domestic product) expansion of about 4.7% in 2023-2025. The region will keep its status as the world’s fastest growing,” added the rating agency. – July 26, 2022
