Asean inflation below global levels, but region still vulnerable to rising prices

Singapore

THE latest spike in global factory gate prices is unlikely to alter investment flows into South-east Asia despite the risk of cost pass-through from major world economies such as the United States and China.

Cost pressures have been rearing their head in Asia, with the Chinese producer price index (PPI) reporting a 26-year high in October.

But although the trend is likely to persist into 2022, inflation remains relatively less of a concern for the Asean region.

"A big reason for this is Asia's lagged recovery from the pandemic that has limited the ability of businesses to pass through rising costs to consumers," said Priyanka Kishore, the head of India and South-east Asia economics at Oxford Economics.

HSBC's chief Asean economist Joseph Incalcaterra added that South-east Asian economies have been spared demand-driven price pressures, as "most Asean economies are emerging from months of restrictions, and the rebound in consumer spending has been somewhat tepid - unlike the bounce seen earlier in the year in the US and European Union".

"As a result, the pass-through from PPI to consumer price index (CPI) should be minimal," he said.

Kishore noted that the "inflation gap" in Asean is more visible on the consumer front, rather than on the producer side - implying a cap on wages.

This lower cost of labour "has been a traditional advantage for Asean economies and should continue to bolster their attractiveness as investment destinations", she remarked.

That might be good news for South-east Asian businesses hoping to scoop manufacturing investments in a lower inflation environment. Still, such businesses may have limited room to benefit from the trend.

That's as analysts also observed that commodity and raw material costs are elevated globally, while supply-chain disruptions could even encourage manufacturing clients to produce in sites nearer their end-markets - rather than in South-east Asia.

Khoon Goh, the head of Asia research at ANZ, added: "As the cost pressures are global in nature and not country-specific, I do not see it having a major impact on investment flows."

UOB research head Suan Teck Kin reiterated that the Regional Comprehensive Economic Partnership (RCEP) mega-trade deal would be a more prominent driver for supply-chain relocation into Asean.

South-east Asian manufacturing powerhouses such as Singapore, Thailand and Vietnam will benefit from RCEP, and "the region will be a large production base, which will offer investors a wide range of choices to configure their investments", he said.

Granted, consumer prices are still under threat, and will not be immune from the uptrend seen elsewhere.

While still largely within the bounds of central banks' forecasts, inflation has crept up in economies such as Singapore, Indonesia and Malaysia.

The ongoing price action in the US, "given their size as a market, will likely impact global price dynamics in the near term", noted Nicholas Mapa, a senior economist at ING.

With China an outsized trade partner for Asean, the spike in PPI there may also have a visible impact on the region, other economists told The Business Times.

Said Goh: "The rising China PPI will filter through into imported inflation in the region given China's key role in manufacturing everything from intermediate inputs to finished products that are exported to other countries."

US PPI came in at 8.6 per cent in October, alongside a 31-year high in consumer inflation.

China's latest PPI hit a record 13.5 per cent, and CPI more than doubled on the month before.

Mapa added that "higher inflation has surfaced in Singapore and will likely filter through to the rest of the Asean in the coming months" as other regional economies start to recover from the Covid-19 downturn.

"Singapore was one of the first to acknowledge that inflationary pressures may be less transitory... We do see other central banks in the region adjusting their policy stance as well, as a combination of faster inflation and the impending US Federal Reserve rate hike prompts action," he said.

But Suan said that - despite persistent inflationary pressures such as air and sea freight bottlenecks, and manufacturing disruptions in production markets like China and Vietnam - "inflation is not a major issue in the region and the mentioned bottlenecks should work themselves out in time".

Kishore, who also expects the supply-side pressures to ease in 2022, added: "This should allow their central banks to remain on pause for longer, especially if there is little evidence of a wage-inflation loop forming due to abundant labour market slack."