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.

Few of the statistics agencies in Asia adjust data for seasonal factors, such as the Lunar New Year which distorts month-on-month readings in China and some neighboring economies every January and February.

Comparing year to year solves that problem, but introduces another set of concerns over base effect and timeliness.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Food inflation back on the table:

China March inflation:

GRAPHIC on commodity prices: http://r.reuters.com/hyk57s

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Seasonal adjustment is notoriously difficult to get right. Some economists think the U.S. government mismeasured seasonal shifts in the labor market this past winter, reporting an abnormally sharp drop in the jobless rate.

Nomura's Subbaraman said he thinks inflation will become a bigger problem for Asia later this year. Rising commodity prices, easy monetary policy and tight labor markets suggest that as demand picks up, inflation will quickly follow.

The Bank of Korea and Bank Indonesia both hold policy-setting meetings this week, and are expected to keep rates steady, mindful of the inflation threat even though price pressures are currently subdued.

CONFLICTING SIGNALS

China's inflation numbers on Monday were a case study in how confusing the data can be. The consumer price index rose 3.6 percent year on year, more than economists polled by Reuters had expected. But a measure of producer prices pointed the other way, dropping 0.3 percent from a year earlier.

That suggests little inflationary pressure in the pipeline because manufacturers would feel the effects of rising costs before consumers do.

Yet the month-on-month figure showed the producer price index rose 0.3 percent between February and March, which indicates price pressures may indeed be building.

Because China does not seasonally adjust the data, it is hard to read too much into changes between February and March. The lunar new year fell in January this year, so prices for food and other holiday-related items spiked that month and then eased somewhat in February. The pickup in March may have had more to do with the fact that prices had subsided in February.

Food was the primary driver behind the unexpected pickup in the March CPI, although unlike a year ago the main culprits were fruits and vegetables, not pork.

Vishnu Varathan, an Asia economist with Mizuho in Singapore, said he was watchful of signs that inflation was re-emerging as a threat, but saw little to fear in Monday's data. High pork prices persisted last year, but it takes longer to rear a pig than to grow a cabbage.

What we know about food inflation tells us there's no reason to get distressed, he said. What we know about fuel inflation tells us there may be a problem but it hasn't come home to roost yet.

Varathan said he would be more worried about Asia's inflation threat if conflict in the Middle East sent oil prices back up to 2008's record high near $150 per barrel.

WHAT'S EATING ASIA

Food and energy account for about 40 percent of the consumer price index basket in most Asian economies outside of Japan, so watching commodities provides the clearest window into where inflation is heading.

Commodity price moves also explain why the yearly inflation data clashes with the month-on-month figures.

The Thomson Reuters-Jefferies CRB index <.CRB>, a broad measure of commodity prices, fell by as much as 15 percent from mid-March 2011 to mid-March 2012. But it was up 1.5 percent from mid-February to mid-March this year.

Even more worrisome to some inflation watchers is how rising commodity prices seem to be filtering through the economy and ultimately into higher wages. The big worry is a wage-price spiral, where pricier goods lead to higher wage demands, which in turn feeds back into higher prices.

China has been at the forefront of raising wages. Its latest five-year economic plan calls for an average annual minimum wage increase of 15 percent through 2015. Rival exporting economies may follow their lead, knowing that they too can boost wages without losing their competitive edge.

Rahul Bajoria, an economist with Barclays in Singapore, points out that wage hikes have been implemented or planned in Thailand, Malaysia and parts of Indonesia, bolstering his view that inflation pressures are building.

The trough in inflation is going to be a lot shallower than what we were earlier expecting, Bajoria said. You have to look beyond the headline (inflation rate) and understand that the price dynamics are turning a bit more unfavorable.

(Reporting by Emily Kaiser; Editing by Mathew Veedon)

Thailand South Korea Japan China