In financial markets, the risk of stagflation is on every investor’s lips these days. The toxic mix of a marked slowdown in growth and mounting inflationary pressures has unnerved markets, contributing to a 5.4 per cent decline in global equities since September 6. A confluence of supply-side shocks stemming from the reopening of the world economy – a severe energy crunch , bottlenecks crimping global trade flows and acute labour shortages – are causing inflationary pressures to persist much longer than central banks had hoped, and are slowing the pace of the post-pandemic expansion. While stagflation fears have gripped markets in advanced economies, the challenge of responding simultaneously to the “stag” and the “flation” is more daunting for policymakers in emerging markets. Not only do the performance and outlook of developing countries hinge heavily on financial and economic conditions in the developed world, volatile food and energy prices have a higher weighting in inflation baskets. The added pressures of the US Federal Reserve’s faster-than-expected timeline for interest rate increases and the threat of spillovers from China’s property sector-induced slowdown are putting emerging markets under more strain. Some economies, such as Brazil, have already been forced to tighten monetary policy sharply in an effort to curb inflation and shore up local currencies. Others, such as South Africa, have held off mainly due to concerns about slowing growth. Although idiosyncratic factors are important – energy exporters, such as Russia, are benefiting from the surge in oil prices, while central European economies have little exposure to China – one region stands out in having kept the stagflation bogeyman at bay. Asia’s emerging markets have proved relatively resilient in the face of the intensifying inflationary pressures and sharp slowdowns that have posed acute policy dilemmas for central banks in other parts of the world. To be sure, developing economies in Asia have been hit hard by the rapid spread of the Covid-19 Delta variant, which has caused manufacturing activity to contract as government restrictions forced factories to close. Indonesia, Thailand and the Philippines all sit at the bottom of Bloomberg’s Covid Resilience Ranking, which shows where the virus is being handled most effectively with the least amount of economic disruption. Thailand’s ‘Phuket Sandbox’: a ray of hope for Asia’s tourism industry? Just as worryingly, with the exception of Malaysia, all the region’s economies are net energy importers. The surge in oil prices is putting local currencies, public finances and current account balances under strain, fuelling inflationary pressures. The Indian rupee, the Thai baht and the Philippine peso have led Asian currencies lower versus the dollar over the past month. Yet, the stagflation narrative has not taken hold in developing Asia as strongly as in other regions. Not only did asset prices in Asia’s emerging markets experience more modest declines last month, none of the central banks have been forced to hike rates to tame inflation and stabilise markets. South Korea, a developed economy, is the only country in Asia that has raised borrowing costs since the pandemic began. While inflationary pressures in developing Asia are building – most acutely in China, where producer prices rose 9.5 per cent year-on-year in August, a 13-year high – consumer prices are significantly lower than in Latin America and Eastern Europe. Indeed, in a report published on Tuesday, JPMorgan noted that while inflation data has been stronger than expected in most parts of the world in recent months, emerging Asia’s inflation readings have been softer than forecast, making the stagflation theme “less applicable” to the region. Still, it is just a matter of time before Asia joins the emerging market tightening camp. India, where core inflation (which strips out volatile food and energy prices) stands at 5.8 per cent, is under the most pressure to raise rates. Markets are also pricing in rate increases in other countries over the next 12 months, including Thailand. However, the fact that investors are prepared for tighter policy, coupled with stronger economic fundamentals in the region, make a repeat of the abrupt and aggressive rate hikes in India and Indonesia in 2013 in response to the “taper tantrum” highly unlikely. ‘Nixon Shock’ still a threat to global economy, 50 years on Moreover, the fact central banks in Asia’s emerging markets have more inflation-fighting credibility than a decade ago should help them manage the risks posed by higher inflation, which now include a more hawkish Fed . There is also a strong case to be made that central banks should not be increasing borrowing costs to combat a surge in inflation caused by supply-side constraints. Higher rates are not going to fix broken supply chains, bring down energy prices or plug labour shortages. As vaccination campaigns in developing Asia continue to progress, and manufacturing activity picks up again due to the easing of virus-induced restrictions, economies should be able to enjoy decent growth without having to slam on the monetary brakes. Stagflation risks are exaggerated to begin with, given that global economic conditions today are not half as dire as they were in the 1970s. In Asia’s emerging markets, repairing the damage caused by the spread of the Delta variant is the overriding concern right now. Nicholas Spiro is a partner at Lauressa Advisory