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Asean Affairs   28  July  2011

Inflation remains a critical Asian challenge

By  David Swartzemtruber

AseanAffairs     28 July 2011

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The interplay between economics and politics is a steadfast feature on the global scene and the current drama going on in Washington D.C. is an exemplary example. However, after the debt ceiling crisis is resolved in the United States, inflationary pressures in Asian countries should be the next great concern.

Anticipating increasing inflation, the Asean Development Bank raised the flag on the issue today.

It’s widely acknowledged that Asian economies led the world out of the 2009 recession but as investment and capital inflows strengthened so did inflation. In China, inflation rose above the government’s 4 percent ceiling and lending rates were raised five times. India, Taiwan and Thailand have also recently raised interest rates.

As the global economy moderates due to the joblessness in the United States and Europe’s debt debacle, the fallback in consumption will rest on the domestic economies of Asian economies. In those economies, increased demand coupled with higher commodity prices are expected to keep inflation high.

To counter this, Asian central banks are likely to maintain a tight monetary policy.

However, politics will come into play.

In Thailand, for example, the new Pheu Thai-led government has pledged to raise wages unilaterally in spite of strong opposition from the business community and also plans to raise the rice prices. Both of these programs could exacerbate inflationary pressures.

The country most severely affected in the region is Vietnam as the country struggles to maintain inflation at 17 percent, as food prices have shot up in the last few months.

There is no question that global demand will taper off due to European and US economies. China’s manufacturing sector may decline this month for the first time in a year.

It is hoped that a tight monetary policy and managing capital inflows will stave off rampant inflation during the second half of 2011.

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