Analysis: Asia gauges inflation through rear-view mirror

Mon Apr 9, 2012 10:23am EDT
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By Emily Kaiser

SINGAPORE (Reuters) - Depending on where you look, Asia's inflation is either benign or stubbornly hot.

China's March inflation rate stayed below Beijing's 4 percent target and appeared to be on a softening trajectory, and South Korea's dropped to a 20-month low. But other figures show price pressures actually picked up last month, and factories paid more for raw materials.

The disconnect stems from the way inflation is measured. The primary indicator in many Asian economies compares prices against a year earlier, not the prior month as is common in the United States and Europe.

That can be misleading.

Asia's inflation looks tame now largely because prices were high a year ago, when oil spiked because fighting in Libya threatened supplies, and shortages of pork and other food drove up costs. Economists call that the base effect.

Central bankers trying to calibrate interest rates need to know where prices are headed, not where they've been. Otherwise, they risk missing the warning signs of a build-up in inflation that will only become harder to contain.

"The month-on-month data gives you a better gauge of the inflation pulse, what's happening right now," said Rob Subbaraman, chief Asia economist for Nomura in Hong Kong. "I'm a little bit skeptical of looking too closely into the year-on-year numbers now."

Each data set has its limitations.   Continued...

A vendor takes a nap near boxes of fruits at a wholesale market in Wuhan, Hubei province April 9, 2012. China's annual inflation rate hit 3.6 percent in March, with volatile food prices leading a temporary rebound that pushed costs above expectations but left intact the view that Beijing has the flexibility to ease monetary policy to support growth. REUTERS/Stringer (