Morgan Stanley On The Inflation Story Scaring The Bejusus Out Of Asian Investors

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Asian investors are frightened of the current inflation environment and believe that consumers are going to spend less in the next 12 months, according to a survey by Morgan Stanley.

The survey suggests that the Asian economic region, sans Japan, will not be able to deal with rising inflation and, instead, will experience a consumer slowdown over the next year as a result of consumers having to pay more for staple goods. In fact, 71% of survey respondents said they fear the inflation outlook in Asia,

But the big story is the potential decline in consumer demand.

From Morgan Stanley:

Despite the rise in headline inflation over the past year, the survey indicates that 45% of the respondents have not seen increases to their household wages over the past 12 months. Looking ahead, more than half of the respondents (59%) are expecting inflation rates to be higher than their expected wage increases, implying a loss to future purchasing power. Across Asia, the problem appears to be more acute in Korea, Taiwan and Japan.

But while survey respondents seem in fear of the future, Morgan Stanley team still projects inflation to peak in June 2011. That doesn’t mean they aren’t worried about downside risks, however.

From Morgan Stanley:

In our view, the sharp rise in exports and commodity prices have significantly increased the upside risks to our upwardly revised inflation outlook, which would bring us closer to our upside inflation forecast of 5.9%, compared with 5.1% in our base case.

So even Morgan Stanley’s team is frightened.

Inflation is on the rise in Asia

The prices of inputs, like fuel, food, and metals are rising.

And the export market has recovered more quickly than anticipated after the impact of the Eurozone crisis abated.

And now everyone is worried prices are going to keep increasing.

And they don't expect wages to keep up with inflation.

And the result will be a reduction in consumption in households across Asia.

This may stunt the Asian consumer revolution. Note it was expected that investment, over saving would rise in China in the next 12 months.

But what if Asian economies have gotten ahead of the problem by raising rates?

And by cutting government stimulus programs that feed money into the economy?

Morgan Stanley project inflation will actually peak in less than three months, so these fears may be overdone.

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