Over the last few weeks, the term ‘food inflation’ has been used synonymously with the benchmark WPI – based inflation by various media channels to highlight the decapitating value of Indian currency in terms of its purchasing power. In fact, even data suggests that food articles comprise a lion share of 14.34% in the Wholesale Price Index.
The food inflation, which came at 18.32% during the week ended December 25, soared for fifth straight week sending jitters among investors about the spill over effects into the broader economy and its growth prospects.
Economists point out that higher food inflation, and consequently untamed WPI, could prompt the Reserve Bank of India to raise interest rates in an attempt to curb burgeoning demand and higher liquidity within the economy.
Further, an up-tick in policy rates could adversely affect the prospects of the construction and real estate sector, as EMIs of home loans inch higher. Similarly, a spurt in interest rates could also affect the demand for manufacturing goods going into the future.
However, India is not the only country that has gone down with the concerns of inflation spooking the domestic growth prospects. Similar concerns are being shared by other Asian economies such as China, Indonesia and Thailand, amid fears of rising commodity prices globally.
Let’s have a check as to how other Asian economies are dealing with the situation to combat the ill-effects of sky-high inflationary pressures:
At the very start of the year, China has already announced that fighting inflation will receive higher priority in 2011. Chinese inflation surged to a 28-month high of 5.1% in November driven by sensitive food articles, higher rental prices and increased labor costs.
Analysts are of the view that if inflation crosses 6% in the mainland in 2011, it might prompt People’s Bank of China to curb expansion by hiking interest rates to put brakes on fast growing markets. In 2010, the Chinese GDP grew at a higher than the estimated rate at 11.9% during the second quarter and 9.6% in third quarter, which was above the comfort zone of their central bank.
Further, China had also imposed tightened mortgage rules and stricter norms on outside investment to limit the amount of foreign investments which was seen as fuelling the bubble scenario in their property market.
Like India, even Indonesia comprises a fifth of its inflation basket by food articles. The core inflation of Indonesia surged to a 20-month high near 6.96% in December which was well above the comforts of Bank of Indonesia.
Indonesia has also been hard hit by prolonged wet weather and strong wind currents last year, hurting its coal and palm oil production. Moreover, Indonesia is also reliant on imports of sugar, wheat and rice.
The government has urged Indonesians to go for home-grown vegetables to reduce reliance on expensive imports and cool down inflation. As of now, Indonesia’s central bank has kept interest rates on hold to stave off from greater inflows from hot money.
Thailand’s headline inflation showed signs of heating up in December powered by transportation, energy and food price increases. Consumer prices came in at 3% higher during the month compared with year-ago period, fuelling concerns of hike in interest rates going further.
Thailand has raised interest rates three times last year in an effort to unwind the stimulus measures provided during the 2008-crash. Moreover, Thailand has seen a pick-up in its export market and that consumption and investment grew strongly in November.
It seems inflation is a common headache for central banks across the globe. Vietnam’s central bank is aiming to stifle the credit growth in the region to 23% in 2011, from 27% in previous year, in its effort to drag inflation lower.
The country runs huge current account deficit as it relies on exports of low-value stuffs like processed seafood and rice which puts pressure on its currency. This might prompt State Bank of Vietnam to hike interest rates and go for currency devaluation.
Bank Negara Malaysia raised its interest rates three times in 2010 to 2.75% in order to combat rising inflation. However, inflation has not surged at a draconian pace in Malaysia aided by slow-paced withdrawal of subsidies and the prospects of ringgit, their local currency, staying strong.
Moreover, economists do not expect Malaysia to move at a brisk pace in hiking interest rates in 2011, unlike India and China, as inflationary pressures have been perceived at stable levels for their economy.
Pakistan is better off than Indian in terms of spurt in onion prices. In fact, India has urged its neighboring country to resume onion exports after unseasonable rains damaged the onion crop in Maharashtra. Other than that, Pakistan is suffering from hyper-inflation in the aftermath of devastating summer floods.
Recently, Pakistan government had rolled back a fuel price hike of 9.2% in the retail price of refined fuels, which took effect on December 31, 2010. While this reversal came on the back of strong political backlash, the step was criticized by IMF from which it had received bailout loan during 2008-crisis.
The Brazilian soil is known as a land of Commodities. However, even Brazil’s consumer inflation reached a six-year high of 5.91% in 2010. This rise in prices has largely been on account of rising food prices – especially meat and beans.
Further, analysts estimate that the inflation is likely to be driven higher on the back of clothing and transportation costs apart from soaring food prices. This might prompt Brazil’s central bank to raise its key interest rates by 0.5% in future.
In a nutshell, high inflation can be detrimental to the prospects of any growing economy.