Fears of rampant Asian inflation prove baseless

PUBLISHED : Wednesday, 23 September, 1998, 12:00am
UPDATED : Wednesday, 23 September, 1998, 12:00am

The latest inflation numbers for Hong Kong showing the consumer price index (A) up a minuscule 2 per cent - the lowest rate in 12 years - may serve as evidence of how much stronger Hong Kong's economy is than those of its regional neighbours.

However, inflation is in fact trending down across the region and, with the exception of Indonesia, never went as high as most commentators expected it to when the Asian financial crisis broke in the summer of last year.

Hong Kong does not particularly stand out.

The first chart shows the average inflation rate for Asia, excluding Japan, weighted by gross domestic product for last year. While it indicates inflation is still rising, it suffers from two serious distortions.

The first is that the mainland had a 37 per cent share of regional GDP last year.

The chart, therefore, shows two big inflation peaks - in 1988 and 1994 - that are almost entirely attributable to the enormous swings in price levels experienced in the mainland during the past 10 years.

The second, and more important, distortion is that although Indonesia's 9 per cent share of the weighting is small, its inflation rate of 77 per cent (that's right, 77 per cent, according to the latest figures) would skew any regional aggregate.

Strip these two countries out and you get the second chart. It shows that inflation in the rest of the region peaked in March at only 6.1 per cent, less than the peaks of 1991 and 1994, and by August had come down again to only 4.5 per cent. These numbers are so low as to cast scorn on the pessimists who predicted wild inflation a year ago.

Break it down country by country and the table below shows that, aside from Indonesia, only the Philippines still has some real troubles with inflation. There are three countries with lower inflation rates than Hong Kong. All countries in the sample, aside from Indonesia, show lower inflation rates than at their peak in July last year - in some cases much lower.

Of course, one can still make the argument that inflation in Asia is understated.

But if you insinuate the government agencies that measure inflation are using 'creative' techniques, you will find that the argument does not hold water. They all use World Bank-standard models and insist their figures are properly collated.

If rice and fish have a heavier weighting in these CPI baskets than in yours, it only means you are probably wealthier than most Asians.

Inflation is one of the biggest causes of financial crises around the world - but not right now in Asia.