High Oil Prices Will Not Raise Inflation In Asia: Report

The increase in oil prices in recent weeks has raised concerns that inflation in Asia will soon rise sharply. However, according to Capital Economics, even if oil prices stayed at current levels, inflation would continue to ease across the region.

Inflation increased in y/y terms in Pakistan and India, but in every other Asian country it continues to ease, notes Capital Economics. In every country inflation in February was lower than average for 2011, when higher commodity prices pushed up food and fuel prices.

Despite the ongoing decline, there are growing fears that high oil prices will cause a resurgence of inflation. The price of Brent crude has risen by around 18 percent since mid-December, but in y/y terms it is up by just 7 percent. At this time last year, when high oil prices did lead to a sharp increase in inflation, Brent crude was up by almost 50 percent y/y points out Capital Economics.

In fact, if oil prices were to remain at current elevated levels, energy-price inflation would still ease over the next few months.

Admittedly, an escalation in tensions between Iran and the West could lead to another step-up in oil prices, adds Capital Economics. However, it is expected that Brent crude will end this year below $100pb.

Slower growth in Asia is another reason to expect inflation to ease. While the global outlook has brightened in early-2012, it is expected that the world economy will grow at a slower pace this year than it did in 2011 reports Capital Economics. That said, Asia’s growth could slow to only slightly below trend this year, so core inflation is likely to drift downwards rather than fall sharply.

Growth in Q1 is likely to be better than it was in Q4 across most of the region, says Capital Economics. But with inflation set to creep lower and growth likely to be sluggish, rate cuts are likely to be resumed. Lower policy rates would support domestic demand during a period when exports are struggling.