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Opinion
Joe Little
Renee Chen
Joe LittleandRenee Chen

Asia could hold clues as to where US inflation and Federal Reserve policy is going

  • Central banks in China and the industrial Asian economies leading the economic recovery have been dovish and patient, unfazed by the recent pickup in inflation
  • Similarly, the Fed is unlikely to tighten policy this year and could even leave it until 2024

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A man rides past the Federal Reserve building in Washington, on January 22. Photo: Bloomberg
Joe LittleandRenee Chen

As economic growth restores itself in the aftermath of Covid-19, rising inflation and the timing of US Federal Reserve tightening is back on investors’ minds. Fed officials continue to talk a dovish game, but investors have doubts, especially given sharply rising consumer prices and elevated asset valuations.

After US inflation rose to a 13-year high in April, the Fed reassured investors that the surge was transitory and that policy lift-off would be deferred until maximum employment is reached. But investors’ doubts have intensified against a backdrop of higher bond yields, the Biden infrastructure plan, and some economists predicting a cyclical overheating.

In assessing the inflation and policy outlook for the United States and other Western economies, one important clue could be the recent trends in Asia.

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After all, China and the industrial Asian economies have been the lead indicators right through the pandemic – as the first into it and the first to return to pre-pandemic gross domestic product levels. There are three important Asian policy trends.

First, a rapid pickup in inflation is not enough to unsettle policymakers. Consumer price indices (CPIs) are rising quickly in South Korea, Singapore and Taiwan compared to the low base last year, driven by higher energy costs and the demand recovery. In China, producer and wholesale price inflation is also rising quickly, and concerns around price stability and affordability have been noted.

01:10

What are CPI and PPI?

What are CPI and PPI?

Across the region, supply constraints on semiconductors and other inputs mean that some sectors face cost pressures and profit margin squeezes. Yet so far, Asian central bankers appear relaxed, willing to look past supply-side inflation or to deal with it using regulatory measures.

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