Inflation round-up

While much of the developed world is in danger of falling into a high-inflation trap, according to the Bank for International Settlements, China is bucking the global trend. Its latest annual consumer price index movement was a modest 2.5% at end-June. While that reading was up from May's 2.1%, forecasts suggest Chinese inflation will remain contained.

The main reason behind lower Chinese price pressures is not exactly cheery: an economic slowdown, largely caused by widespread lockdowns because of Covid-19. There is also the fact that Beijing is leaning on pork producers and retailers to persuade them not to pass on rising costs to consumers - pork prices are a huge factor in the calculation of China's inflation rates.

Where China leads, much of Asia follows, and the country's outsized economic influence on the rest of the continent is evident in regional inflation forecasts. Average CPI inflation for 2022 is predicted by Consensus Economics to be only 3.2% in Asia-Pacific, compared to 6.9% in Western Europe, 7.8% in North America, 13.6% in Latin America (minus Venezuela) and an alarming 23.3% in Eastern Europe. It's not just Chinese influence, though; Asia is also suffering less from shortages of grains and sunflower products stemming from the war in Ukraine, because it consumes less of them than other parts of the world.

China's low inflation may now be helping the rest of the world too in its fight to bring down the cost of living. Weaker demand from China has already caused numerous commodity prices, such as for copper and oil, to fall back. Meanwhile, crop prices are also descending at last, so some food price relief is likely. The downside for producers is of course reduced export revenues, and that, alongside weak domestic demand because of high prices, means that worries about a global recession are overtaking those about soaring inflation. While it is possible to have both, at least for a while, there is no doubt that the most common cure for high inflation is an economic contraction. Whether the cure will be worse than the condition, only time will tell.

As far as expatriate staff from Asia are concerned, the comparatively low inflation in their home countries could mean they require high cost of living index adjustments in their host locations. The effect will in some cases be offset by relative home currency strength. However, while the Chinese yuan, Indian rupee, Indonesian rupiah, Malaysian ringgit and Singapore dollar have all gained recently against the euro, they have all lost ground against the US dollar, so it will depend on which host country is involved. The yen, however, has been very weak and outbound assignees from Japan could see very big index adjustments indeed, because Japanese inflation also remains relatively low. As always, ECA's next cost of living survey, to be compiled in September, will reveal all you need to know to protect your international assignees' purchasing power, in Asia, or anywhere else.

Numerous countries joined our double-digit inflation table (above) this time. The vast majority of those on the list are emerging market economies, whose currencies are weakening against a persistently strong US dollar. With global commodities generally priced in dollars, costs for such purchasers are even higher than the nominal dollar price would suggest.

In other inflation news, the European Central Bank has warned that the impact of the war in Ukraine on agricultural commodities such as fertiliser, animal feed and sunflower oil could mean that food prices in the Eurozone keep rising at near-record rates for at least another year, despite a fall-back in prices recently and the region’s mostly self-sufficient agricultural sector.

Sri Lanka, whose citizens have finally forced their disastrous president to resign, will also be stuck with high inflation for some time to come, especially since it has been forced to hike VAT from 8% to 12% to try to rebuild government finances.

Finally, in more VAT news, Qatar still appears to be in no rush to implement VAT, even though it agreed to do this along with other Gulf Cooperation Council members way back in 2016. Its latest excuse is the current high inflation around the world, which is obviously less inconvenient for some than others!