Why is inflation relatively low in some places?

In the face of the public clamor about the cost of living, policymakers like to point out that rising prices are a global phenomenon.

“Every country in the world is being affected by this inflation,” U.S. President Joe Biden said on June 10, after the U.S. reported its biggest loss since 1981 (consumers in May compared with a year earlier). prices rose by 8.6%).

Indeed, after Russia invaded Ukraine in February, the cost of fuel, fertilizer, grain and other commodities has risen everywhere. But not everywhere is full of inflation.

Eight of the 42 large economies shown on the Economist’s metrics page still have inflation below 4 percent. Six of the eight were in East or Southeast Asia. The region also includes smaller oases of price stability, such as Vietnam (2.9% inflation in the year to May) and Macau (1.1% in the year to April).

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What are the reasons for this Eastern exceptionalism? Part of the reason is the spread of two diseases. An outbreak of African swine fever between 2018 and 2021 is estimated to have severely devastated China’s pig population, with as many as 200 million pigs culled. This has greatly increased the price of pork, a staple in East Asia.

Prices then fell sharply. In mainland China, for example, pork prices fell more than 21% in the year to May. This helps offset inflationary pressures elsewhere in the economy. (It also helps that East Asia, unlike the rest of the world, has more rice than wheat. Since Russia invaded Ukraine, rice prices have risen 8%, while wheat prices have risen 17%.)

Another anti-inflationary disease in the region is Covid-19. Many parts of Asia have coexisted with the virus more slowly and reluctantly than in the West. For example, Indonesia did not completely waive quarantines for international arrivals until March 22.

In Malaysia, travel and movement did not return to normal until early May, a full month after the country officially entered a “transition to endemic” phase, according to a social restriction index developed by bank Goldman Sachs. Even now, Taiwan remains cautious. Its past success in stopping Covid-19 has left its population with little natural immunity and no Western fatalism about the disease.

Of course, China continues to impose severe restrictions on the movement and gathering of people who have become infected. Recent lockdowns in Shanghai and elsewhere have hindered both the economy’s ability to supply goods and the willingness of consumers to buy them.

In theory, this double disruption of supply and demand could push prices either way. But the damage to consumer spending appears to be more severe and long-lasting. In May, the second month of Shanghai’s lockdown, retail sales fell nearly 10% (in real terms) from a year earlier, despite a 0.7% increase in industrial production.

Restrictions on cross-border travel have been devastating to the economy of Hong Kong, especially Macau, whose casinos depend on tourists from the mainland. In fact, Macau’s GDP in the first three months of this year was less than half of what it was in the same period in 2019. In this case, 1% inflation doesn’t seem so magical. In fact, the rise in prices is indeed a miracle.

In the West, high inflation has forced many economic policymakers to turn hawkish. For example, the US Federal Reserve felt compelled to raise interest rates by 0.75 percentage points on June 15, faster than planned. The Fed’s new position in the fight against inflation complicates East Asia’s struggle against the same enemy. High U.S. interest rates attract global capital flows, putting downward pressure on Asian currencies.

Hong Kong, which pegged its currency to the U.S. dollar, and Macau, which pegged its currency to Hong Kong, were forced to raise rates a day after the Federal Reserve did. Malaysia and Taiwan have also raised interest rates this year, and Indonesia, at 3.5 percent, is expected to raise rates next month, according to JPMorgan Chase & Co.

Malaysia and Indonesia have also tried a less orthodox response to the price hike: export bans. Indonesia briefly banned overseas sales of palm oil, and Malaysia retained its export ban on live chickens. Its purpose is to preserve all the country’s supplies for its own people. But those policies could backfire if falling prices prompt local farmers to cut production.

Such bans have also fueled inflation elsewhere in the region. Singapore, in particular, relies on poultry imports from its larger neighbors. The two’s economic intimacy and rivalry are coming home.

An exception to this tightening trend is Japan. At its June 17 meeting, the Bank of Japan reiterated its commitment to buy as much 10-year government bonds as possible to keep yields below 0.25%. It decided to stick to the cap even as U.S. equivalent yields have risen sharply above 3.2%. That yield gap has sent the yen tumbling, which has fallen to its lowest level against the dollar since 1998.

A weaker yen will push up import prices, leading to inflation in Japan. If higher inflation persists, people will start expecting it, demanding higher wages as compensation. In turn, these higher wages will push up prices, making inflation expectations self-fulfilling.

Such wage price spirals are worrying in many parts of Asia. But in Japan, it’s something policymakers have long sought. After years of weak demand and falling prices, inflation expectations have fallen to dangerously low levels, making it harder for the BOJ to revive the economy in a downturn and prevent a return of deflation. Like everywhere else, Japan suffers from inflation. Its central bankers want to dig deeper.

© 2020 The Economist Press Ltd. all rights reserved. From The Economist, published with permission. The original article can be found at www.economist.com.