Asian central bankers grappling with wobbly markets, higher energy costs and simmering trade tensions are getting relief from an old foe: food prices.
In a region vulnerable to volatile price swings, food inflation has been largely contained, thanks in part to favorable weather and increased investment in production, storage and distribution, Bloomberg reported.
For developing nations like India and China—where food makes up a higher share of spending and consumer price indexes—that’s helped keep a lid on inflation and left them better placed to grapple with the strains caused by US monetary tightening.
Less clear is how long the calm will hold. “Food price inflation across Asia is subdued, but I don’t think central banks can afford to nod off,” said Sumiter Singh Broca, a Bangkok-based official at the Food and Agriculture Organization of the United Nations.
Malaysia, the Philippines, Indonesia, and India have already raised interest rates this year in a bid to support weakening currencies amid a sell-off in emerging markets and to get ahead of inflation pressures linked to rising fuel costs.
Economists at Citigroup Inc. led by Johanna Chua note that although volatility in Asia’s food prices has receded, the oil rally and a cyclical bottoming of food inflation should generate higher risks—especially for fuel-sensitive economies like Thailand and Indonesia.
Rising Oil Price Risk
Food has a weighting in consumer price index in Asia that’s more than three to four times larger than fuel and energy, according to Citigroup.
Shikha Jha, a Manila-based economist at the Asian Development Bank, warns that rising oil prices will push up fuel and transportation costs in the region. “Energy and food prices are moving together very closely,” she said, adding that risks associated with ongoing trade tensions between the US and China also bear watching.
Food costs across Asia can vary considerably, both by item and by country, making an overall reading hard to gauge. Globally, prices are already inching higher. The FAO’s Food Price Index averaged 176.2 points in May to hit its highest level since October. The Cereal Price Index was almost 17% higher than a year ago.
Sizable purchases by Southeast Asian buyers kept rice prices firm, according to the FAO. Thai rice prices are up more than 7% so far this year and the Philippines has shown strong demand for imported rice.
Yet for now at least, the overall picture in Asia is largely benign. “Weather has been rather favorable, which means not so much disruption on food supply coming from mother nature, which has traditionally been disruptive for countries such as India, the Philippines, and Vietnam,” said Trinh Nguyen, a senior economist for emerging-market Asia at Natixis Asia Ltd. in Hong Kong.
But unfavorable base effects, higher oil prices, weather risks and weaker currencies mean the cost of imported goods are likely to pick up, she said.
Higher Costs
In a sign that pressures can quickly rebound, India’s inflation picked up for a second straight month in May to 4.9%, giving ammunition to the central bank to raise interest rates again. Food prices rose 3.1% in May from a year ago, up from 2.8% in April.
Indonesia has seen food prices pick up considerably. They climbed 4.5% in May from a year ago, following a 5.2% gain in April—the fastest pace since December 2016.
In China’s case, food is estimated to make up about 30% of the overall inflation basket.
With the US Federal Reserve all-but-certain to raise interest rates again this week, Asia will continue to face pressure to keep in step or see their currencies weaken. In that environment, contained food prices may not be enough to keep Asia’s central bankers sidelined, but will at least give them more flexibility than they’ve enjoyed in the past.
“Food prices are likely to remain stable over the near term,” according to the UN’s Broca. “But we can’t be sure over the longer term.”
