Asian economies brace for surge in imported inflation


Inflation measured via the consumer price index (CPI) remained elevated in the US in August at 8.3%, despite a slight moderation. Thus, at its upcoming meeting this week, the US Federal Reserve is expected to deliver a higher-than-anticipated interest rate hike. In addition, other developed market (DM) central banks such as the European Central Bank and the Bank of England, are seen opting for more front-loaded rate increases.

In comparison, Asian central banks could maintain a gradual hiking pace. One reason is that Asia’s inflation cycle is benign relative to the US and Europe and there is limited evidence of a wage-price spiral, according to a Nomura Global Markets Research report dated 14 September. Second, Asia’s central banks have a different policy reaction function and supporting recovery is still a priority for many emerging-market (EM) Asian central banks, the report said. The widening wedge between developed market and EM interest rates can culminate into a threat for the latter.

cause and effect

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cause and effect

“A key risk for Asian central banks amid widening interest rate differentials is continued currency weakness, as it can aggravate imported inflation risks,” according to Nomura. A steeper interest rate rise by the Fed means a strengthening of the dollar. For emerging countries, this would push the cost of procuring imported commodities higher. For Asian economies, every 5% local currency depreciation can push retail inflation up by 20 basis points on average, Nomura estimates. Easing global commodity prices could offset the surge in imported inflation from a depreciating currency and vice versa.

“In India’s core CPI, 41% is goods core inflation, which will capture part of imported inflation such as fuel prices (petrol and diesel for transportation),” said Gaura Sen Gupta, an economist at IDFC First Bank. A weaker rupee would counter some of the declines in global crude oil prices. However, the impact of imported inflation on CPI will only be felt when retail petrol and diesel prices are passed-on, she said. Prices of these fuels were last changed by oil marketing companies in April 2022.

On the other hand, India’s inflation measured via the wholesale price index (WPI) eased in August on the back of a sequential decline in imported products. Thus, the gap between India’s CPI and WPI has started to narrow, providing some relief. However, if commodity prices were to rise, a spike in imported inflation could push WPI inflation higher, reversing the narrowing gap between the CPI and WPI.

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