Asia is the exception to global inflation


The world is going through a dramatic inflation. Except where there is no place.Domestic prices have risen sharply US And the United Kingdom — the overall consumer price index rose by 6% and 4%, respectively — sparked concerns about the central bank’s catastrophic mistakes and a return to the long-term inflation of the 1970s. But in most parts of Asia, price increases have been suppressed. This divergence provides lessons for current and future economic policies.

In China, the consumer price index has risen by 1.5% compared to a year ago, while in Japan, as usual, the inflation rate is roughly zero. In Australia, the overall CPI may rise by 3%, but the potential inflation rate of 2.1% is close to the bottom of the central bank’s target range.

Compared with many countries in Europe and South America, only two large emerging markets in Asia have inflation rates above 5%-Sri Lanka and Pakistan. Judging from Tokyo, Beijing or Jakarta, the surge in global inflation is not at all global.

Although Asia imports a lot of energy and the prices of oil, natural gas, coal and other commodities are the same as in the rest of the world, the same is true. The reason why Asian inflation is mild but not severe comes down to a simple factor: it has responded to the Covid-19 pandemic better than the rest of the world. In most of the region, countries have managed to avoid mandatory lockdowns altogether (South Korea); restrict their scope and duration (China and Taiwan); or postpone such measures until the vaccine is available in 2021 (New Zealand).

The consequences of this relative success are now working in many ways. In terms of economic demand, consumption in Asia has less drastic fluctuations from services to goods and back, which marks the experience of the United States and Europe, as they entered a state of lockdown and then returned. If you have never been kept at home, you will not feel the need to buy a treadmill, a new TV, and enough wood to decorate your backyard. If you can get regular haircuts, dental checkups, and alcohol with friends, you won’t have to rush to the barbershop, dentist, and nearest bar when the economy reopens.

Generally speaking, Asians are also more cautious than Europeans or Americans when the economy is opening up. For example, the Governor of the Bank of Japan Haruhiko Kuroda pointed out in a recent speech that in Japan, elderly households account for nearly 40% of consumption. But even if Japan’s retirees are now basically vaccinated, their service consumption has not returned to normal, let alone the boom after the pandemic.

Less demand fluctuation means less pressure on supply response. But the Covid-19 pandemic also illustrates the consequences of Asia’s dominance in global manufacturing. Since this region produces most of the world’s things, it can more easily maintain adequate supplies.

Gareth Leather and Mark Williams of Capital Economics discussed some of these factors in a recent report. For example, since the outbreak of Covid, the cost of shipping containers from China to Europe has increased fivefold, while the cost of shipping within Asia has only doubled. When Covid prompted the closure of factories, Asian companies had more alternative supplier options in the region, which meant fewer supply disruptions. In the automotive sector, South Korea and China can ensure that domestic manufacturers give priority to scarce semiconductors. The U.S. automobile inflation rate reaches double digits. In East Asia, prices have hardly increased.

One of the biggest differences between Asia and the United States is the supply of labor. When the new coronavirus hit, many workers in the United States were fired, quit their jobs to take care of children affected by school closures, or chose to quit their jobs to avoid contracting the virus. The result was a lasting blow to the labor supply. This has pushed up wages in the United States and the United Kingdom-which is an important reason for worrying about inflation.

There are few signs of similar wage growth in Asia. Avoiding lockdowns — or using wage subsidies to allow workers to continue working in the worst-case scenario — makes the whole incident less traumatic. In Australia and New Zealand, labor force participation rates are close to record levels. “Labor is hoarding,” Kuroda said. “Even when demand rises due to the recovery of economic activity, Japanese companies can maintain the ability to rapidly increase supply.”

There is no need to worry about immediate inflation. Asian central banks can promote economic recovery. Countries such as New Zealand and South Korea are raising interest rates either because the economy is in a state of full employment, they are worried that the economy will overheat, or because they are worried about financial stability. The Reserve Bank of Australia confidently stated that it does not expect to raise interest rates in 2022. The Bank of Japan, as usual, does not expect to raise interest rates at any time in the foreseeable future.

For central banks in Europe and the Americas, the experience in Asia further proves that their high inflation is caused by the devastation of the pandemic. This interference should be reduced. But Western central banks cannot be as optimistic as Asian central banks: if wages rise, temporary inflationary pressures will continue. The different options for dealing with Covid-19 have many consequences. Those of inflation are now becoming obvious.

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