ASEAN-5: Evaluating key inflation drivers
- Inflation is heating up in ASEAN-5
- Reopening boost aside, a smaller fiscal response in the last two years…
- … and deep labour market scarring have limited the spillover into demand
- We undertake a PCA study to analyse inflation catalysts for ASEAN-5 countries
Inflation – a dominant concern
Developed economies have shifted from an extended disinflationary phase before the pandemic to confronting a strong inflationary run, in recent quarters, testing the respective central banks’ tolerance.
Recent US inflation prints have surged to four-decade highs, driven by a combination of global triggers i.e., food and fuel commodities, post-pandemic surge in demand, port backlogs, and domestic i.e., tight labour market, higher wages, savings cushion, and idiosyncratic forces. Our momentum gauge also underscores broad-based pickup in inflation, much to the chagrin of the central bank. The Russia-Ukraine conflict has further amplified the rally in global commodities, which in our view, will keep the US Federal Reserve on the policy tightening path this year.
Are all inflation worries the same?
Inflationary concerns are starting to rise in the ASEAN-5 bloc (Indonesia, Malaysia, Philippines, Thailand, and Vietnam) as well, even as headline prints have not deviated far from targets (except Thailand). A challenging geopolitical backdrop and resultant surge in commodity prices is, unsurprisingly, adding to concerns as many in the region are net importers, particularly for their energy needs.
While the regional trend is heating up, the nature of inflation facing this part of the region is different from the West on two counts:
• Firstly, the US and European governments’ fiscal support during the pandemic were not only significantly large but also consisted of direct demand-boosting measures including cash handouts and short-term employment support schemes. In contrast, the ASEAN-5 countries received smaller fiscal boost, with measures including indirect sops like credit guarantees, asset quality freeze, moratorium, and sustenance support via social safety nets.
• Secondly, concerns that a supply-shock would immediately translate into generalised price pressures are also less applicable for this bloc, as the pandemic resulted in medium-term labour market scarring for most economies, hurting employment as well as income levels. Jobless rates have yet to return to pre-pandemic levels. Add to this, a significant part of the labour force also comprises of informal and casual labour, weakening the immediate passthrough of higher inflation to wage pressures and thereby stronger demand.
At 3.2% through January 2022, inflation momentum in ASEAN-5 is substantially lower than in the US, EU, or Singapore, as shown in the chart below. While adverse food and fuel commodity price movements threaten regional inflation, the risk of this producing sustained second order impact via a tight labour market and wage pressures is less threatening in ASEAN-5 than in the developed economies.
Regional policymakers are likely to monitor the scale and pace of US Federal Reserve rate hikes to maintain stability in their financial markets. Rates hikes amongst the ASEAN-5 countries is also on the anvil, but central banks are neither likely to match the timing nor the scale of the US Fed. More so, if the recent commodity spike adds to growth risks, regional policymakers are likely to grow more cautious.
Principal Component Analysis
We carry out Principal Component Analysis (PCA) to decipher the main drivers of headline consumer price inflation in the ASEAN-5 countries (Indonesia, Malaysia, Philippines, Thailand, and Vietnam). Based on our analysis, we make the following three observations:
• Global (commodity prices, US dollar direction), regional (China’s activity), and domestic factors are amongst the important drivers for ASEAN-5 inflation
• Rising global commodity prices are the dominant driver and driving upside pressures on headline inflation
• Domestic/other factor has dampened inflation dynamics, except for Malaysia, going into 2022. The regional factor, which seems to be linked to China’s slowing activity, is also seen as a drag, due to Asia’s tight trade linkages
In the PDF, we discuss each of the ASEAN-5 countries.
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