Macroscope | Why cooling inflation is no silver bullet for Asia’s economic concerns

In the United States, monetary policy is caught between a rock and a hard place. Cracks in the country’s resilient labour market have become more pronounced in the past months, exacerbated by US President Donald Trump’s attacks on immigration. On October 14, US Federal Reserve Chairman Jerome Powell said “the downside risks to employment have risen”, signalling a further reduction in interest rates later this month.

On the other hand, inflation has remained above the Fed’s 2 per cent target amid signs that higher trade tariffs are leading to sharper rises in prices for many import-dependent goods. According to JPMorgan, headline inflation, which rose from 2.3 per cent in April to 2.9 per cent in August, will stay above 3 per cent for the next year. This is fuelling concerns the US is drifting towards stagflation – in which weak growth coincides with elevated inflation – and making it harder for the Fed to lower borrowing costs.

In Asia, the policy dilemma facing central banks is not as acute. Inflation ceased to be a major concern some time ago, so much so that HSBC said “the question arises whether the pendulum has swung so far that Asia is now facing the risk of a prolonged period of deflation going forward”.

Among the leading economies in the region, China and Thailand have already seen spells of falling prices since 2023. Even so, it is the dramatic decline in inflation in economies where consumer prices were much higher in the aftermath of the Covid-19 pandemic that is more striking. In India, headline inflation fell to just 1.5 per cent last month, down from 6.2 per cent as recently as October 2024 and the second time since July that inflation has dipped below the lower bound of the Reserve Bank of India’s target range.

In Singapore and the Philippines, inflation has dropped from 6-9 per cent in early 2023 to 0.5-1.5 per cent in August. This explains why Asia “has witnessed long [monetary] easing cycles over the past year”, JPMorgan said. Interest rates in the Philippines, South Korea, Thailand and India have fallen by at least a percentage point from their peak.

Even in Indonesia, where policy credibility is hanging by a thread following last month’s ousting of Sri Mulyani Indrawati, the country’s long-serving technocratic finance minister, and the erosion of the central bank’s independence, borrowing costs have fallen sharply.