Asia’s Inflation Trap

Asia has an increasingly alarming inflation problem, but its leaders are reluctant to address it decisively, worried that higher interest rates and stronger currencies will choke off export-led growth. But the longer they delay, the more wrenching the ultimate policy adjustment – and its consequences for growth and employment – will be.

NEW HAVEN – Asia has an inflation problem. The sooner it comes to grips with its problem, the better. Unfortunately, the appropriate sense of urgency is missing.

Willingness to tackle inflation is impeded by Asia’s heavy reliance on exports and external demand. Fearful of a relapse of end-market demand in a still-shaky post-crisis world, Asian policymakers have been reluctant to take an aggressive stand for price stability. That needs to change – before it’s too late.

Excluding Japan, which remains mired in seemingly chronic deflation, Asian inflation rose to 5.3% in the 12 months ending in November 2010, up markedly from the 3.5% rate a year earlier. Trends in the region’s two giants are especially worrisome, with inflation having pierced the 5% threshold in China and running in excess of 8% in India. Price growth is worrisome in Indonesia (7%), Singapore (3.8%), Korea (3.5%), and Thailand (3%) as well.

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