ASIAN INFLATION PRESSURES SET TO EASE

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South Korea, Thailand and Indonesia reported slowing rates of growth in consumer prices yesterday, prompting suggestions that Asian inflation has peaked and probably monetary policy tightening with it.

Tim Condon, head of Asia research at ING, said: “The tightening cycle is over across Asia. A lot of this is an oil call, and if oil spikes again we will see upward inflationary pressures.”

Although China has been reporting slowing price growth since May, inflation continued to rise in much of the rest of the region. Last week Japan reported that its core inflation rate hit a decade high of 2.3 per cent in July from the same month in 2007, while Vietnam said consumer prices rose 28.3 per cent in August, up from 27 per cent in July.

Falling commodity prices and a resultant slowing of food price inflation was a key factor in yesterday's data reports. Robert Prior-Wandesforde, a senior Asia economist for HSBC, said: “In Asia, food explains 60 per cent of the overall inflation rate in the last year, with energy accounting for 15 per cent.”

The extent to which inflation drops across Asia will be limited by food commodity prices remaining relatively high, wage increases, exchange rates weakening against the dollar and monetary authorities' reluctance to tighten further.

“At current levels, oil is still about 60 per cent more expensive than at the same time last year and should continue to weigh both on the external balances and economic growth in South Korea as elsewhere in Asia,” said Frederic Neumann, of HSBC.

Mr Prior-Wandesforde added: “It's going to require a lot more policy action than we're likely to get to see inflation down at the levels we were at a few years ago.” Moves in June by Seoul and Bangkok to expand subsidies to reduce fuel and other bills for the poor helped cool last month's price growth figures.

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South Korea's consumer price index rose 5.6 per cent in August from a year ago even though economists had expected growth to top July's 5.9 per cent gain. Analysts said the Bank of Korea would probably keep interest rates on hold next week after raising rates to an eight-year high of 5.25 per cent last month.

In Thailand, year-on-year inflation slowed to 6.4 per cent from a decade high of 9.2 per cent in July. Most economists had expected a rate in excess of 8.5 per cent. Core inflation, which excludes energy and fresh food, plummeted 100 basis points to 2.7 per cent, returning to the central bank's target range for the first time in three months.

Indonesia said its inflation rate was 11.85 per cent year-on-year, just below July's 11.9 per cent figure. Bank Indonesia is one of the few central banks that might still raise rates this month to meet its 2009 inflation target, which is about 7 per cent.

Both South Korea and Indonesia, however, reported a weakening of export growth. South Korea's year-on-year exports grew 20.6 per cent in August, down from 36 per cent in July, while Indonesia saw its first monthly trade deficit this year. Japan reported its slowest wage growth of the year, indicating pay rose 0.3 per cent in July.