Rising commodity prices putting pressure on Asian region inflation: ADB

Rising commodity prices are putting upward pressure on inflation in the region, though the rates of consumer price increases remain low for most economies. Inflation forecasts for developing Asia are revised to 2.8 percent in 2016 and 3.0 percent in 2017, up by 0.3 percentage points each year (Table 1).

After dropping to US $ 26/barrel on January 20, 2016, oil prices rebounded to more than US $ 40/barrel in April. They have consistently been above US $ 40 since April 8 (on June 8 climbing past the US $ 50/barrel mark) and are currently trading within a narrow band of US $ 46– US $ 50/barrel. Several factors put upward pressure on crude oil prices: rising oil demand, ongoing declines in the US rig count and crude oil production and worsening oil supply outages.  

In addition, the onset of the summer driving season in North America has supported prices. On the other hand, the recent strengthening of the US dollar and the failure on June 2 of the Organisation of the Petroleum Exporting Countries to agree on a production ceiling have hampered further upside gains.

 
Futures markets still signal a modest recovery in prices over the next two years. The Brent crude oil price is forecast to average US $ 43/barrel in 2016 and US $ 50/barrel in 2017.
The World Bank food price index averaged 98.9 points in June 2016, 8.9 percent higher than in June 2015. This was the second consecutive month of year-on-year price increases after more than three years of declines. Further, the June increase marked the fifth consecutive month that the food price index rose. 

However, food prices still languish 25.8 percent below their August 2012 peak. According to the latest Food Outlook report from the Food and Agriculture Organisation of the United Nations, global food commodity markets are broadly stable, supported by adequate supply, and the prospects for market supply remain favourable for 2016 and 2017. The food price index is forecast to contract by 1.0 percent in 2016 and rise by only a modest 2.0 percent in 2017.
 

East Asia 
East Asia inflation projections are revised up for 2016 and 2017 as higher prices are now expected in the PRC, Mongolia and Taipei, China. In the PRC, consumer price inflation averaged 2.1 percent in January–June 2016. While weaker demand is containing price pressures, the stabilization of global commodity prices and a strong cyclical increase of domestic food prices have been pushing up consumer price inflation and moderating producer price deflation faster than expected. Inflation forecasts are therefore revised up to 2.2 percent from 1.7 percent for 2016 and to 2.4 percent from 2.0 percent for 2017. 

Significant loosening of monetary policy is pushing prices up in Mongolia. In Taipei, China, inflation in the first five months of 2016 showed strong increases, especially in February and March, driven by sharp increases for fruits and vegetables.

With further easing of monetary policy possible, as well as pressure to stimulate the economy, higher inflation is now anticipated, at 1.3 percent in 2016 and 1.5 percent in 2017.
 

South Asia 
The South Asia inflation forecast of 5.2 percent for 2016 is in line with the projection in ADO 2016. Most 2017 inflation projections for individual economies remain current— excepting Bangladesh and Bhutan, which can now expect lower inflation thanks to domestic factors such as ample food supply and slow private sector credit growth, and still low global fuel and commodity prices. Despite this, the subregional inflation forecast remains at 5.7 percent for 2017. 

In India, inflation in May 2016 was 5.8 percent, slightly higher than the 5.5 percent recorded in April 2016. The pickup in inflation was driven entirely by food prices, while fuel inflation eased marginally and core inflation remained largely unchanged.
 

Southeast Asia 
Inflation in Southeast Asia is now seen at 2.2 percent in 2016, which is lower than original forecast of 2.6 percent. The forecast for 2017 is revised from 2.9 percent to 3.0 percent. The unexpected reduction in fuel prices in Indonesia will likely slash inflation from 6.4 percent in 2015 to 3.9 percent in 2016. Inflation is seen accelerating slightly in 2017 as both growth and energy prices firm up. 
Inflation in the Philippines is expected at 1.8 percent in 2016, a downward revision from 2.3 percent in ADO 2016. The adjustment is in line with a lower-than-expected result in the first five months as the impact of El Niño on food prices was less severe than anticipated. Rice imports augmented domestic supplies, helping to ease price pressures. 

The inflation forecast for 2017 is revised slightly up to 2.8 percent in anticipation of higher gains in oil prices. The forecast for Brunei Darussalam has deflation moderating slightly in 2016 as economic growth picks up, but subsidies and price controls will continue to keep inflation low. In Singapore, deflation is projected to persist through 2016 but reverse in 2017. 

The inflation forecast for Thailand in 2016 is revised downward in light of relatively low oil and commodity prices and the slow pace of economic growth. Inflation in the Lao People’s Democratic Republic is expected to pick up at a slower pace as global oil prices increase only moderately, as does the growth of bank credit in the economy.
 

Central Asia 
In Central Asia, although inflation has been lower than expected during the first five months of 2016 in Armenia, Georgia and the Kyrgyz Republic, an increase in the inflation projection for Kazakhstan in 2016 is pushing up the aggregate inflation forecast to 11.0 percent from the 10.8 percent projected in ADO 2016.

In Kazakhstan, average inflation in the first half of the year stood at 15.9 percent. As there has been an upward trend in inflation since the beginning of 2016, particularly for non-food items, the inflation forecast for the year is revised to 13.5 percent from 12.6 percent. Inflation in the subregion is forecast to slow in 2017 to 5.7 percent, slightly below the 5.9 percent projected in ADO 2016. This anticipates waning pass-through of local currency depreciation to consumer prices, particularly in Kazakhstan.

Inflation in the Pacific is projected at 4.4 percent for 2016, down from the 4.5 percent forecast in ADO 2016 in light of lower-than expected price increases so far this year. In 2017, sub regional inflation is still expected to rise to 4.7 percent, as in ADO 2016, in light of a projected modest recovery in international food and fuel prices.