Does Asia have more to fear from rising petrol prices as crude oil hurtles towards $100 a barrel than it does from slowing growth in its biggest export market of the United States?

In fact, both rising prices and U.S. demand are cause for concern that could ultimately leave Asian central banks with a policy dilemma, economists say.

Rising prices fuelled not only by oil but also by food point to the need for tighter monetary policy to control inflation.

But tighter monetary conditions could crimp domestic spending just when policy makers want to lean on local demand to make up for a slowdown in exports to the United States, where a housing downturn is expected to drag on economic activity.

If we're losing our export driver of growth in Asia and we have to rely on domestic demand, it is going to take some hit from oil, said Bill Belchere, economist at Macquarie Research.

Asian exports to Japan and the United States have been crimped this year, but rising demand from China and Europe has helped offset that. Inflation has been benign in most places, barring China and India.

But U.S. crude oil prices are now just two dollars short of the $100-mark, having risen a third since late August.

Such a heady price for fuel could hit Asian pockets just as they are already feeling the impact of soaring prices for bread and meat. Higher credit costs would hit disposable income more.

Worse still, high oil prices mixed with falling house prices could dampen consumer spending in the West and that could hurt Asian exports.

It squeezes them a little bit, but luckily they are a bit chubby this time around. They can handle it for a while, Belchere said.

He estimates that every $10 rise in the price of oil sets emerging Asia's trade surplus back by some $30-$40 billion -- not a major concern for a region with combined annual output of $6 trillion and currency reserves of $2.8 trillion.

INFLATION AND CURRENCIES

But the inflation dynamics are different.

Oil has less than a 20 percent weighting in most Asian consumer price index baskets, but food accounts for up to 50 percent. A combination of rising food and fuel prices could cripple consumers and industries.

We're in a fairly late-cycle expansion, meaning that utilization rates for manufacturing and labor market rates are rising, said JPMorgan Chase economist Sin Beng Ong.

It would not take long for inflation to filter through to other economic sectors and more importantly for inflation expectations to start rising, he said.

That would be the biggest concern among central banks, he said.

Higher exchange rates would help stave off the need to push interest rates up by making oil cheaper in local currency terms, Belchere suggests.

The region's trade and current account surpluses suggest the currencies should be rising, but many central banks rein in their currencies to keep exports competitive.

Still, the Philippines and India already seem to have gone down the currency path. The peso and rupee are both up about 13 percent this year against the dollar.

Price pressures from major food, non-food and fuel items were broadly mitigated by the peso appreciation, Philippines central bank Governor Amando Tetangco told reporters this week.

Ong believes Indonesia's central bank, which has cut its policy rates 13 times since last year, could follow. Bank Indonesia left interest rates on hold this week but warned about inflation risks.

Other Asian central banks have been less inclined to let their currencies rise for fear of losing a competitive position on exports to China, whose yuan is tightly managed.

PAY AT THE PUMP

The relentless rise in oil prices is also forcing governments to rethink state caps on retail oil prices that protect consumers from global oil trends.

Most countries in Asia are net importers of oil, barring Malaysia. Several of them, including India, China, Indonesia, and Malaysia, regulate oil prices.

China, the world's third-largest oil importer after Japan and the United States, raised retail prices last week. It has raised its policy interest rates five times this year to control its fast-growing economy and is expected to tighten policy further.

India's government, loathe to raise prices ahead of state elections, is debating how to compensate state oil firms for the losses they accrue under state price controls. It has been raising interest rates too.

But if oil prices stay elevated, the panacea even a rising currency offers is limited, said Frederic Neumann of HSBC, citing the example of South Korea, the world's third-most energy intensive country.

The country's trade surplus certainly provides a temporary cushion to absorb higher import costs, but a fall in net exports would lead to a reduction in overall economic growth, he said.

And as inflation numbers rise and the Bank of Korea tightens policy further, debt financing costs would rise and take a toll on household spending, he said in a note.

Japan China India Inflation