No pressure

Asia's inflation challenge - not enough of it

Asia's main economic challenge in 2014 could be inflation - or rather, the lack of it. Consumer prices are rising at a rate of less than one per cent a year in South Korea and Taiwan, and slower than two per cent in Thailand and Singapore. The 3.1 per cent increase in Chinese consumer prices in September was half the pace of two years ago.

India and Indonesia are the big exceptions to the weak price trend. These domestically oriented economies have uncomfortably high inflation. Both also have large trade deficits and limited exposure to anaemic Western demand, the main depressing force on Asian prices.

Historically, global commerce has mostly produced just about the right amount of inflationary grease for Asia. But OECD estimates world trade volumes to have grown at an annual three per cent since the end of 2011, well below the 6.5 per cent rate typical of recent decades. Asian manufacturers, critically dependent on foreign buyers, have responded by dumping surplus production in domestic markets.

For example, prices of goods sold in Malaysia have fallen 2.7 per cent in two years, dragged down by a 3.6 per cent reduction in prices by local suppliers. In countries like China, exchange-rate appreciation has played a part by lowering import prices. Explosive credit growth sometimes generates inflation, but it hasn't done that recently in Asia. Private sector credit has doubled in Singapore in the past six years, and expanded 75 per cent in Thailand. And, China's local governments have borrowed massively. But the main result of all this credit has been frothy property markets. Hong Kong, with 4.6 per cent inflation, is an exception.

The disinflationary trend is bad for GDP growth. Weak pricing power increases the real cost of borrowing for companies. That discourages investment.

Will it last? Inflation rates might rise next year, if Asian currencies fall in response to tighter monetary policy in developed countries. That would only be a stopgap, though. Without strong demand from the West, disinflation will remain a threat.

Could it get worse? Outright deflation is unlikely in countries with young populations such as Vietnam and the Philippines. But South Korea had better watch out.