Asia is the exception to global inflation

The world is witnessing a dramatic bout of inflation. Except for the places where they are not. Sharp price hike we And the UK – where the headline CPI rose 6 per cent and 4 per cent respectively – raised fears of a catastrophic mistake by central banks and a return to chronic inflation of the 1970s. But price increases are weak in most parts of Asia. This difference holds lessons for economic policy now and for the future.

In China, the consumer price index is up 1.5 percent compared to last year, while in Japan, as usual, the inflation rate is almost zero. In Australia, the headline CPI may rise by 3 per cent, but core inflation of 2.1 per cent is towards the bottom of the central bank’s target range.

Only two large emerging markets in Asia have inflation above 5 percent – Sri Lanka and Pakistan – compared to many markets in Europe and South America. From the perspective of Tokyo, Beijing or Jakarta, the global rise in inflation doesn’t seem global at all.

This is true even though Asia imports a lot of energy and has suffered the same jump in the prices of oil, gas, coal and other commodities as anywhere else in the world. The reason that inflation in Asia is moderate rather than severe is down to one simple factor: It has handled the Covid-19 pandemic better than the rest of the world. In most parts of the region, countries have managed to avoid forced lockdowns altogether (South Korea); determine its scope and duration (China, Taiwan); Or delay these measures until 2021 when vaccines become available (New Zealand).

The results of this relative success are now visible in several ways. On the demand side of the economy, Asia has seen fewer dramatic fluctuations in consumption from services to goods and back again that has characterized the experience of the United States and Europe, as they went into lockdown and back again. If you’ve never been cooped up at home, you’ll never feel the need to buy a treadmill, a new TV, and enough wood to decorate your backyard. If you can catch up on regular haircuts, dental checks and drinks with friends, meanwhile, there’s no need to rush to the hairdresser, dentist, and nearest bar when the economy reopens.

Asians have also been, in general, more cautious than Europeans or Americans when their economies are opening up. In Japan, for example, elderly families account for nearly 40 percent of consumption, Bank of Japan Governor Haruhiko Kuroda noted in a recent speech. But although retirees in Japan are now largely vaccinated, their consumption of services is not yet back to normal, let alone a post-pandemic boom.

Slight fluctuations in demand meant less pressure on supply to respond. But the Covid-19 pandemic has also made clear the consequences of Asia’s global industrial dominance. Since the region makes most of the things in the world, it can easily maintain a good supply.

Gareth Leather and Mark Williams of Capital Economics discuss some of these factors in a recent note. For example, while the cost of shipping a container from China to Europe has risen fivefold since the Covid hit, the cost of shipping it within Asia has only doubled. When Covid urged factory closures, Asian companies had a greater choice of alternative suppliers within the region, which meant less disruption to supply. In the automotive sector, South Korea and China have been able to ensure that domestic producers have priority access to rarefied semiconductors. There is a double-digit inflation of cars in the United States. In East Asia, prices have barely risen.

One of the biggest differences between Asia and the United States is the supply of labour. When Covid struck, many workers in the United States were laid off, quit their jobs to care for children affected by school closures, or chose to quit to avoid contracting the virus. The result was a permanent blow to the labor supply. This raises wages in the US and UK – a big cause for concern about inflation.

There is little sign of a similar acceleration in wages in Asia. Avoiding shutdowns — or using wage subsidies to keep workers in their jobs during the worst of it — made the whole event less traumatic. In Australia and New Zealand, labor force participation was close to record levels. “Labour hoarding has enabled Japanese companies to maintain their ability to rapidly increase supply even when demand is rising due to the resumption of economic activity,” Kuroda said.

Without an immediate inflation to worry about, central banks in Asia can nurture the economic recovery. Those who raised interest rates, such as New Zealand and South Korea, did so either because the economy was running at full capacity and feared overheating, or because of concerns 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 anytime in the foreseeable future.

For central banks in Europe and the Americas, the experience of Asia adds weight to the view that high inflation was caused by the disruption caused by the pandemic. This turmoil must subside. But Western central banks cannot be as optimistic as their Asian counterparts: if wages accelerate, temporary pressures on inflation will become persistent. Differing options in dealing with Covid-19 have had many consequences. Those related to inflation are now apparent.

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