Asian inflation in the pipeline

In the US, the question has to be centered around consumer inflation expectations and what impact this will have on core inflation going forward. In Asia, the question is what impact will rising inflation have on interest rates and goods produced for export.

Ever since, the Berlin Wall fell and China integrated into the global economy, there has been a seemingly endless supply of cheaper labor to produce manufactured goods for the West. In fact, the global labor arbitrage that has led many Western companies to manufacture in Asia is the leading reason why the inflationary monetary policy of the U.S. Federal Reserve did not show up in consumer prices throughout the 1990s and well into this decade.

However, with the surge in commodities prices that has come to an end. Commodity prices have exploded the budgets of many Asian and Middle Eastern countries that are running trade surpluses with the U.S. because the governments there have subsidized oil costs for consumers. However, these governments are being hit by a double whammy due to their foreign exchange policy and the subsidies of oil.

First, many countries in Asia and in the Middle East peg their currencies to the dollar. The dollar, has been a weak currency, falling to multi-decade lows against the Canadian and Aussie Dollar as well as over 50% versus the Euro. This means that oil prices in those countries have skyrocketed that much more as the dollar has plunged. Therefore, one could rightly blame the interventionist foreign exchange policies for much of the inflationary excesses.

In addition, the oil subsidy is killing Asian governments and many have reduced the subsidy including China. Vietnam, one of the countries worst hit by inflation, just increased gasoline prices a massive 31%, quite a bit for low wage workers to handle at one time.

Moreover, oil prices have risen in all currencies. Inflation in Asia is so acute that riots over the costs of basic necessities of food and oil are sparking civil unrest. This translates into higher wages for workers and a dilemma for producers. In the past, as the inflationary pressures in this decade have increased, labor was so cheap that producers could eat some of the costs in order to maintain their markets. Now, producers are being forced to pass on costs as labor costs, production costs, and interest costs are all increasing.

All the while, interest rates across Asia are well below rates of inflation, effectively paying borrowers for the privilege of borrowing.

All of this is coming to an end very soon because it is not sustainable. The long and short of it is that Asia will pass on costs to the West. So, the disinflationary trends of the 1990s and earlier this decade is well and truly over. But, for the Asian economies themselves, one must wonder if this voltility presages a hard landing. After all, once the export markets dry up due to rising costs and recession in the West, there will be insufficient domestic demand to make up the slack.

These issues are going to come to a head in the next few months.