Global economy headed up...and so are food prices

Policymakers under pressure as signs of inflation emerge
Fiona Chan Straits Times 11 Jan 10;

ECONOMIC growth has yet to make it back to a firm footing, but policymakers in Asia are already being confronted with another emerging challenge: inflation.

Oil prices have been rallying in line with the global recovery, hitting levels above US$83 a barrel earlier this week, near a 15-month high.

Food prices are also rebounding from their 2009 lows, potentially increasing price pressures in Asian countries that are already seeing asset bubbles build up.

This has led economists such as Action Economics' David Cohen to predict that central banks in the region will have to start tightening monetary policy by the middle of this year.

This could include raising interest rates or appreciating their currencies.

Inflation recently peaked here at about 7.5 per cent in mid-2008. Runaway inflation, if it takes hold, can cripple an economy as too much cash, worth less and less, chases too few goods and services.

'Countries like South Korea and India are more likely to tighten policy earlier as they are facing higher inflationary pressures,' he said.

Mr Cohen thinks the Monetary Authority of Singapore (MAS) may tighten policy - in Singapore's case, this is done by letting the Singapore dollar return to a path of gradual appreciation from the current policy of zero appreciation - only in October.

Unlike other central banks, MAS does not set interest rates. 'Inflation seems reasonably contained here right now, and the MAS may want to wait and see what other central banks are doing first,' Mr Cohen said.

But Barclays economist Leong Wai Ho believes that inflation in Singapore may start rising more sharply in the second quarter of the year, raising the probability that MAS will move to let the Singdollar appreciate earlier, in April.

MAS reviews its monetary policy twice a year, in April and October.

Mr Leong believes inflation will hit 4 per cent for the whole year, above the Government's forecast of 2.5 per cent to 3.5 per cent.

The official forecast may not have factored in the risks of rising food prices, he said. Food makes up about a quarter of Singapore's consumer price index (CPI), the key measure of inflation. 'Singapore is more open than most countries and almost everything we eat is imported,' Mr Leong said.

One major example is Thai fragrant rice, the price of which has surged by 26 per cent since Nov 1, thanks to storms in the Philippines and drought in southern China, he said. 'At these levels, we're starting to see physical hoarding take place among Thai rice exporters, which means they probably have expectations that rice prices will go up even higher.'

And it is not just rice. Soya beans and edible oils like palm oil are also seeing a rise in prices, which in turn may make livestock more expensive since these crops go into animal feed.

While inflation still looks benign now - Singapore's CPI in November inched up 0.4 per cent from October but slid 0.2 per cent from a year earlier - price pressures are likely to increase in the coming months, Mr Leong said.

Already, the United Nations Food and Agriculture Organisation has said that global food prices are on the rise again, as its food price index rose for a fourth straight month in November and hit its highest level since September 2008.

In India, food price inflation has been rising almost 20 per cent over a year ago, coming close to an 11-year high, said a report by Bloomberg last Thursday. Monsoon rains in the June to September period, India's main source of irrigation, were the lowest in almost 40 years, reducing production of rice, pulses and wheat.

Food prices are also rising in China - prices of vegetables shot up by as much as 10 per cent last week in some areas - as extreme cold weather damages crops and transportation problems hamper delivery.