In 2008, inflation in China, India, Hong Kong and Singapore may be surprisingly high due to domestic rather than global factors, said a Credit Suisse report on Monday.
In China, Hong Kong, India and Singapore the common ultimate drivers of inflation are the output gaps and lagged inflation.
These are the economies where the demand side pressures resulting from a narrow output gap are probably the strongest, labour market have also tightened rapidly and therefore core inflation is rising. In addition, monetary indicators in China and India are flashing red and may induce further inflationary pressure in the next 12 months.
?There may be a risk that the momentum of inflation in China, Hong Kong, India and Singapore builds at a faster pace than we are forecasting for 2008,? said the report Inflation momentum in China and India is likely to be the greatest in the region and hence lagged inflation may assert more pressure in the future.
China and India stand out on the M3 growth front, while Indonesia is susceptible to the impact of high volatility in the exchange rate on inflation. Regional central banks need to continue to implement prudent monetary policies to contain inflationary expectations.
Rising transport costs and unanticipated commodity price shocks from oil and food prices may push regional inflation higher.
?In countries where the degree of pass-through from exchange rates to inflation is visible, the risks to our CPI inflation forecast may be tilted to the upside,? said the report. Countries experiencing a higher pass through are India, Indonesia and Singapore.
The evidence is mixed for the Philippines and Thailand.?We find a close relationship between Asia?s output gap and inflation. This is being driven by strong GDP growth in China, Hong Kong, India and Singapore.
The narrowing of Asia?s output gap emanating from these countries is reflective of robust retail sales and exports.