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Inflation Tough to Digest for Central Banks in Asia
Shamim Adam | July 25, 2011

In Asia, where food makes up 30 percent of inflation indices, record-high prices have economy-wide impact. (Bloomberg Photo/Adam Dean) In Asia, where food makes up 30 percent of inflation indices, record-high prices have economy-wide impact. (Bloomberg Photo/Adam Dean)
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Singapore. Asian cuisine may be too much of a good thing for some of the region’s central banks as policy makers grapple with the challenge of responding to spikes in the cost of staples from rice and pork to onions and chilies.

Pork prices jumped 57 percent in June in China, leading Prime Minister Wen Jiabao to vow to curb inflation even as growth slows. India had to buy onions from archrival Pakistan this year for curries and Indonesia told spice lovers to grow their own chili as shortages stoked prices.

A wider variety of diet and greater purchasing power for nonfood items leave wealthier nations less vulnerable to food-cost spikes.

Food makes up more than 30 percent of inflation indices on average in Asia, compared with about 15 percent in Europe and less than 10 percent in the United States, according to Rabobank Groep. Their economies’ sensitivity to swings in meat and vegetable costs means emerging market policy makers need to raise interest rates more to stem inflation when global agriculture prices soar.

“People can’t change their diets overnight,” said Song Seng Wun, an economist at CIMB Research in Singapore who has analyzed Asian economies for more than two decades. “All monetary policy can do is to try to contain what is perhaps a supply disruption issue from broadening to the wider economy.”

Rice, the staple food for about half of the global population, has surged 70 percent in the past year according to futures traded on the Chicago Board of Trade. The export price of rice from Thailand, the world’s biggest exporter of the grain, has jumped 23 percent.

Within Asia, home to 60 percent of the world population, food’s weighting in consumer-price indexes varies from about 45 percent in the Philippines and India to more than 30 percent in China and about 10 percent in South Korea, Rabobank says.

“For low-income countries, food expenditures normally account for a larger share of the consumption basket,” said Yao Xianbin, director of the Regional and Sustainable Development Department at the Asian Development Bank in Manila. “As countries get wealthier, food expenditure will account for a declining share of total expenditure.”

Mexico has also seen challenges from reliance on a relatively limited diet. An increase in the cost of tortillas, a staple of the nation’s diet since the Maya ruled 1,000 years ago, stoked a slump in Mexican bonds and the peso in 2007. President Felipe Calderon arranged a price freeze with tortilla makers and the central bank boosted rates into 2008 even as the global financial crisis took hold.

In China, the rise in pork prices made up more than a fifth of June’s overall inflation rate. An average Chinese will eat an estimated 38.8 kilograms of pork in 2011, compared with 9.6 kilograms of chicken and 4 kilograms of beef, according to the US Department of Agriculture.

Inflation has breached the Chinese government’s 4 percent target for 2011 every month this year, with consumer prices rising 6.4 percent in June from a year earlier, the most in three years. The nation has raised lending rates five times since mid-October.

World food prices neared a record in June as the cost of sugar, meat and dairy increased. An index of 55 food commodities rose to 233.8 points from 231.4 points in May, the United Nations Food and Agriculture Organization said on July 7. The gauge climbed to an all-time high of 237.7 in February.

A fivefold jump in Indonesian chili prices last year made the spice costlier than beef. Indonesian’s agriculture minister, Suswono, said at the beginning of 2011 that the government would distribute chili seeds to 100,000 households. Bank Indonesia, while trailing counterparts from Thailand to Malaysia this year, raised rates in February.

In India, where the price of onions has at times become an election issue, the central bank has raised rates 10 times since the start of 2010. The world’s second-biggest onion grower said in December it would buy the vegetable from abroad and banned exports after excess rainfall damaged crops and stoked prices.

Indian food-price inflation quickened to a three-week high of 8.31 percent in the week ended July 2, before easing to 7.58 percent the following week. Montek Singh Ahluwalia, an adviser to Prime Minister Manmohan Singh, said last week it would take “several months” to bring inflation to an acceptable level.

Bloomberg