While the inflation problems in China and India may be all anyone can talk about, Asian economies are actually having a pretty diverse experience with rising prices.
Morgan Stanley suggest the problem is the result of both easy money policies and currency pegs.
Core developed economies and emerging economies’ central banks are the drivers behind this merry-go-round. Super-expansionary monetary policy in the mature economies is imported by emerging economies through their US dollar soft or hard pegs. This has been pumping up EM growth and commodity prices and is fueling EM wage and consumer price inflation. Having gained a toe-hold in EM, inflation is then exported into mature economies through more expensive goods exports. ‘Rationally inactive’ central banks in the mature economies accommodate this imported inflation, ultimately risking a domestic inflation take-off.
But what makes a country like Taiwan, with such low inflation, different than its regional rivals? Two things, according to Sharom Lam and Jason Liu.
Food price was the major price stabiliser for the mild inflation, in our view. The food self-sufficiency ratio is high, and the agricultural sector had a good winter harvest this year.
Given the higher commodity prices in the international market, Taiwan could continue to see cost-push inflation as it is heavily dependent on imported raw materials. On the other hand, the appreciation of TWD may help to ease imported prices.
Taiwan’s ability to manage its inflation problem stems from its ability to avoid import cost issues through domestic food production and currency management. Other regional powers may have something to learn from this, notably on the currency front.
Note, Vietnam’s incredible inflation, likely partially to due with the problems managing their currency:
[credit provider=”Morgan Stanley”]