{
  "title": "What Drives Inflation in Asia and Why it Matters",
  "publication": "IMF Blog, November 1, 2010",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2010/11/01/what-drives-inflation-in-asia-and-why-it-matters",
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  "summary": "What Drives Inflation in Asia and Why it Matters",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Title and author: \"What Drives Inflation in Asia and Why it Matters\" by Anoop Singh.\n- Publication date: November 1, 2010.\n- Related IMF work referenced: Regional Economic Outlook for the Asia and Pacific region, October 2010.\n- Central question: What is driving inflation in Asia, how will inflationary pressures evolve, and what policy tools should policymakers use to manage the withdrawal of crisis-era stimulus while balancing low inflation and economic growth?"
    },
    {
      "heading": "Inflation pressures are building up",
      "content": "- Current assessment: \"inflation still isn’t a ‘problem’ in Asia\" but \"it is on the rise in some countries in the region.\"\n- Core inflation risk: Conditions are \"ripe for rising core inflationary pressures—that is, inflation excluding volatile items such as food and energy.\"\n- Contributing factors:\n  - Economic activity in much of emerging Asia has been growing faster than expected so far in 2010.\n  - 'Output gaps' have been \"closing rapidly\" (actual output getting close to 'potential' or maximum capacity).\n  - Financial conditions \"remain still quite accommodative (e.g., low interest rates, plenty of liquidity).\"\n- Outlook question posed: If growth continues to be robust, could inflationary pressures in Asia accelerate, or is inflation still largely a reflection of global food and energy prices?"
    },
    {
      "heading": "Changing inflation patterns across countries",
      "content": "- Heterogeneity in drivers:\n  - China: \"inflation mainly responds to food prices, as the economy’s large capacity to supply other goods and services keeps non-food inflation down.\"\n  - India: \"although commodity prices are a key factor, both the domestic supply of and demand for goods and services have a significant impact on inflation.\"\n- Three region-wide factors highlighted:\n  - First: \"the combination of economic growth rates above a country’s ‘potential’ or full capacity, and easy monetary conditions (such as negative real policy rates) is usually a recipe for inflationary pressures down the road.\"\n    - Note: 'output gaps' across the region \"are closing rapidly.\"\n  - Second: \"although supply shocks (such as commodity prices) continue to matter for inflation in Asia, demand factors are also becoming increasingly important.\"\n    - As Asian economies grow and consume more, \"the role of output gaps in driving inflation rates in the region is increasing.\"\n  - Third: When an economy is close to its 'potential', \"renewed pressures on global commodity prices may be more likely to add to inflation.\"\n    - Rationale: firms find it easier to pass onto consumers increases in production costs.\n    - Additional feedback: \"if emerging Asia continues to grow rapidly, this may also lead to higher commodity prices, as demand from the region has become an important driver of many of these prices.\""
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- General implication: If \"domestic demand pressures continue to become a bigger factor in core inflation, it will become increasingly important to step up the pace of policy normalization.\"\n  - Empirical note: \"this process has already started in many Asian economies, with central banks having raised their policy rates and reserve requirements since late 2009.\"\n- Complicating factor: Recent surge in capital inflows can undermine tightening by \"depressing local long-term interest rates,\" making policy-rate increases less effective.\n  - Monetary tightening still important to manage liquidity associated with inflows, especially given prospects for monetary easing in advanced economies and \"the generally limited flexibility of exchange rates here.\"\n- Exchange rate policy: \"continuing with recent steps to allow for stronger currencies would be more conducive to normalizing the policy stance and would also be more effective in managing volatile capital inflows.\"\n- Medium-term structural policy needs:\n  - Recognize that \"capital inflows into emerging Asia are likely to remain strong over the medium-term\" because of \"better growth prospects and stronger policy fundamentals than in advanced economies.\"\n  - Required policies to absorb flows:\n    - \"deepening of financial markets,\"\n    - \"channeling such flows towards financing broader-based growth and much needed infrastructure.\"\n\nAuthor: Anoop Singh — November 1, 2010\n\n---\n\n\n References\n\n- Regional Economic Outlook\n\nSource: https://www.imf.org/en/blogs/articles/2010/11/01/what-drives-inflation-in-asia-and-why-it-matters"
    }
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    "Authors: Anoop Singh",
    "Published: November 1, 2010",
    "Title and author: \"What Drives Inflation in Asia and Why it Matters\" by Anoop Singh.",
    "Publication date: November 1, 2010.",
    "Related IMF work referenced: Regional Economic Outlook for the Asia and Pacific region, October 2010.",
    "Central question: What is driving inflation in Asia, how will inflationary pressures evolve, and what policy tools should policymakers use to manage the withdrawal of crisis-era stimulus while balancing low inflation and economic growth?",
    "Current assessment: \"inflation still isn’t a ‘problem’ in Asia\" but \"it is on the rise in some countries in the region.\"",
    "Core inflation risk: Conditions are \"ripe for rising core inflationary pressures—that is, inflation excluding volatile items such as food and energy.\"",
    "Contributing factors:",
    "Outlook question posed: If growth continues to be robust, could inflationary pressures in Asia accelerate, or is inflation still largely a reflection of global food and energy prices?",
    "Heterogeneity in drivers:",
    "Three region-wide factors highlighted:",
    "General implication: If \"domestic demand pressures continue to become a bigger factor in core inflation, it will become increasingly important to step up the pace of policy normalization.\"",
    "Complicating factor: Recent surge in capital inflows can undermine tightening by \"depressing local long-term interest rates,\" making policy-rate increases less effective.",
    "Exchange rate policy: \"continuing with recent steps to allow for stronger currencies would be more conducive to normalizing the policy stance and would also be more effective in managing volatile capital inflows.\"",
    "Medium-term structural policy needs:",
    "[Regional Economic Outlook](http://www.imf.org/external/pubs/ft/reo/2010/apd/eng/areo1010.htm)"
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