The Asian continent grapples with a burgeoning challenge: inflation’s descent poses a more formidable struggle than its ascent did in the preceding year.
Despite a less pronounced surge in consumer inflation throughout Asia compared to its Western counterparts in 2022, the region required an additional half-year, in contrast to the United States, to restore consumer prices to levels preceding the Ukrainian incursion.
Currently, the burgeoning costs of essential food items loom ominously, potentially disrupting the downward trajectory prematurely.
With the exception of China, where a precipitous decline in pork costs has instigated an overall food price contraction, Asian food prices surged by 7.3% in July, relative to the same month a year earlier. This contrasts with the food price index escalation of 4.8% observed in June, along with the pinnacle gain of 7.4% noted in September of the previous year.
India shoulders considerable responsibility for these price escalations. Delayed and erratic monsoon rains have unfavorably impacted crop yields, propelling year-on-year food inflation to an alarming 10.6%.
Concurrently, food price upswings quicken their pace in Japan, while Singapore and the Philippines wrestle with sustained elevated levels, as the velocity of price surges remains relatively constant since the latter half of 2022. Indonesia and Thailand, however, experience a deceleration in price growth due to more consistent supplies, adept management of food distribution, and vigilant price monitoring. The sustainability of these effects remains uncertain.
In a broader context, price vulnerabilities lean towards the upward trajectory. The inception of the El Niño weather phenomenon, potentially resulting in drought and agricultural losses in South and Southeast Asia, coincides with the expiration of the Russia-Ukraine grain agreement and India’s move to curtail rice and onion exports.
Significantly, India contributes 40% to global rice exports; its trade prohibition inflicts a blow upon import-reliant nations like the Philippines and Indonesia, who had sought to enhance rice procurement to preempt conceivable scarcities. Consequently, the International Grains Council’s rice price index has soared to its loftiest point since 2008, concurrently with the cessation of declines in prices for other grains and oilseeds.
The prognosis for further price escalations is fortified by anticipation of more stringent measures from food-exporting nations, coupled with escalating precautionary orders from import-dependent nations. These sentiments are poised to sustain heightened prices across an array of food commodities, thereby inevitably influencing prices for additional food products.
This scenario poses a conundrum for most Asian economies. Given rice’s central role in Asian diets, stable rice prices during the preceding year enabled the region to weather a sharp hike in wheat and select food costs more adeptly than the global average. However, the current landscape is marked by ascendant rice prices.
Notably, nations reliant on net food imports, encompassing advanced Asian economies and the Philippines, confront heightened risk. Yet, even net food-exporting nations like Indonesia and Thailand remain susceptible due to their heavy reliance on imports of wheat, soybeans, and other foodstuffs that could rise in cost if the availability of Black Sea shipments remains uncertain.
The unfolding El Niño pattern could also potentially impede their crop production. Thailand has already indicated a potential reduction in rice cultivation this year to conserve water.
Thus, it is unsurprising that Asian central banks vigilantly monitor inflation risks despite temporarily halting rate hikes. Food comprises 27% of the overall Asian consumer price index, its contribution varying from 14% in South Korea to a substantial 46% in India. Given its substantial weighting, fluctuations in Asian food prices wield substantial influence over headline inflation.
Meanwhile, vulnerabilities stemming from weaker currencies and ascending crude oil prices augment concerns about imported inflation. Brent crude has rebounded to surpass the $80 per barrel mark after plummeting to $71.60 in June.
While the direct impact of oil prices on headline inflation is less pronounced than that of food, its ramifications extend to other items within consumer baskets. Elevated oil prices heighten the expense of agricultural inputs, in turn amplifying food costs. The United Nations attributed July’s 12.1% surge in vegetable oil prices from the previous month to the surge in global crude prices.
Taken together, these conditions render it challenging for Asian central banks to emulate the synchronized rate cuts enacted by their Latin American counterparts this year. Indeed, a few of these institutions, having grappled with the previous year’s inflationary surge, might need to implement further rate hikes as fresh price pressures loom.
Under the leadership of the newly appointed Governor Eli Remolona, the Bangko Sentral ng Pilipinas has judiciously shifted to a hawkish stance and is poised to enact several rate hikes before the year concludes. The Bank of Japan similarly faces mounting pressure to implement more assertive tightening measures. For other regional central banks, a rate cut remains a potential course of action, although such a decision could potentially be deferred until 2024.
This strategic approach aligns with the understanding that, when addressing food inflation, monetary policy yields limited efficacy. A more viable solution invariably hinges on augmenting supplies, with fiscal policy positioned as Asia’s primary line of defense against mounting food prices.
Food constitutes a substantial portion of expenditure for Asia’s impoverished populations, rendering escalating food prices a politically charged matter that often prompts swift governmental intervention.
Increasingly, export restrictions are being favored as a solution. India has augmented its initial measures by imposing a 20% export duty on specific rice exports, with further measures to discourage external shipments anticipated. These measures gain prominence, especially considering upcoming state elections this year and national elections slated for 2024. Given mounting concerns about El Niño, heightened by a dry August, authorities are expected to impose restrictions on overseas sugar and pulses, or dried legumes.
Nonetheless, such remedies possess a myopic outlook. They adversely affect farmers’ income, sending ripples throughout the food supply chain and causing widespread harm. Trade restrictions should serve as a last resort, rather than the immediate reaction to intensifying food inflation.
In India’s case, surplus rice stocks render the precautionary export bans poorly conceived. The focus should pivot towards alleviating supply bottlenecks, enhancing distribution efficiency, facilitating cheaper food imports, and, if necessary, providing greater food assistance to consumers.
Other governments within the region should heed this as a call to reassess their policy arsenal for interventions in the event of spiraling prices. While the struggle against food inflation should not be spearheaded by Asia’s central banks, authorities should judiciously intervene when required.