By Chen Jipeng
SINGAPORE, Jan. 25 (Xinhua) -- Asian economies can expect a hard time ahead fighting inflation, as ample liquidity has been driving up prices for food, fuel and other necessities in the emerging economies, analysts say.
India faces a decade-high inflation of about 16 percent. China and other major emerging economies in the region also face strong inflationary pressures. Latest statistics showed Singapore consumer price index grew 4.6 percent year on year in December, slightly higher than previous market estimates and the highest inflation rate in two years.
While the drivers may be different to some extent, food and fuel remained the two key drivers of consumer price inflation across the Asian economies. The food index of the United Nations Food and Agriculture Organization shows that food prices have reached record levels, threatening to destablize global economic growth.
"What we saw is really two big problems for Asian inflation. Number one is food prices and number two is energy prices," said Tommy Xie, an economist with Singapore-based OCBC Bank.
But Xie said even within Asia there are some differences in the degrees to which the different economies are affected by rising food prices, as the weighting of food in the CPI basket might be different. The Phillipines, Indonesia, India and Malaysia face particularly strong pressures.
Statistical authority of Singapore, which relies on the international market, said food prices rose almost across the board, naming categories such as "prepared meals, vegetables, fresh seafood, rice and other cereals, chilled meat, as well as milk products."
Food prices were up 1.4 percent year on year in Singapore in 2010.
Xie said what is worrying is that the inflationary pressure seemed to have been spreading from food to non-food items in some of the Asian countries over the past few months.
Matt Robinson, senior economist of Moody's Analytics, also said rising food prices as a major threat to global economic growth in a report released on Tuesday.
"Because food accounts for a large proportion of the CPI basket in emerging economies, structural food price inflation can quickly spill over into broader price pressures," he said.
Xie said it would not be easy to curb inflation as the factors are many, such as rising food and oil prices as well as ample liquidity and the low-interest rate environment. These are expected to remain for a while.
Countries in the region might be prompted to "tighten aggressively" if there are risks of inflation getting out of control, and this runs the risk harming their economic growth, he added.
MODERATION IN FIRST QUARTER
Official projection by the Monetary Authority of Singapore says the city state expected a CPI inflation rate between 2 percent and 3 percent in 2011. The OCBC Bank, like most financial institutions in the market, forecasts higher inflation for Singapore, and economists say it is likely that they will adjust the forecast upward in the near term.
Xie said he expected the headline CPI inflation to fall slightly due to the base effect.
The strong Singapore dollar is also believed to help limit imported inflationary pressures, as Singapore relies on imports for food.
Nevertheless, inflation will be "the key focus this year," Xie said.
Robinson said policymakers, particularly in emerging economies, cannot ignore food price inflation as a transitory supply-side phenomenon. He urged prudent use of monetary policy to prevent rising food prices from spilling over into broader inflationary pressures and other government policies aimed at addressing the supply side.
These will be far more important in dealing with food price inflation over the longer term, he said, citing investment in technology, improving farming techniques and upgrading distribution, storage and logistics chains.