APAC: Policymakers’ inflation worries should soon start to subside

Inflation in Asia over the past year has by and large been a story of external supply shocks, rather than excess demand. And with those external forces now easing, so too are we seeing inflationary pressures start to recede. We think inflation will drop much further over the first half of this year, giving policymakers the space to stop raising rates.

What you will learn:

• The edging down of headline annual inflation in recent months underplays the dramatic shift in inflation dynamics since Q3, with monthly comparisons revealing that sequential price increases have slowed sharply. That’s primarily been driven first by a retreat in global fuel prices, and more recently by cooling momentum in food prices.
• We expect external drivers of inflation to subside further over the coming quarters as commodity prices soften and the impetus from food prices eases further. Of course, a period of supply-driven price rises can still drive inflation even after the initial shock has passed, through its impact on expectations and resulting wage and price setting. But we don’t think this will be large.
• Meanwhile, we expect demand-side drivers to be curbed by weak economic activity, as falling export earnings and the effects of previous monetary tightening weigh on growth.