Higher shipping costs may lift Asia’s low inflation

The persistent impact of high shipping costs could see inflation rise in Asia. - Image: Unsplash/Chris Pagan

This article is published in collaboration with IMF Blog

Economist, IMF
Research Analyst, IMF
  • Inflation is rising in a number of advanced and emerging economies.
  • Relative to other regions, Asia has managed to keep levels relatively low.
  • However, the persistent impact of high shipping costs could change this.

New analysis shows how increases in shipping rates have a persistent impact on consumer prices.

As the world economy recovers from the pandemic, inflation is mounting in advanced and emerging economies. Pent-up demand fueled by stimulus and pandemic disruptions is helping accelerate inflation, spread around the world through global factors like higher food and energy prices, and soaring shipping costs.

The chart of the week shows how Asia’s inflation has been more moderate versus other regions, affording central banks room to keep interest rates low and support economic recovery. However, Asia’s tepid price gains may see greater momentum next year. The outlook remains uncertain, and central banks should be ready to tighten policy if inflation pressures and expectations mount.

a chart showing the reasons behind mild inflation in Asia compared to other regions
Inflation in Asia is mild compared to other regions.
Image: IMF

 

Several factors explain Asia’s lower inflation. Among Asia’s emerging economies, a delayed recovery has kept core inflation—which strips out volatile food and energy costs—running at half the rate of peers in other regions. And the cost of food—which makes up about one third of the consumer price index baskets—grew 1.6 percent over the past year, versus 9.1 percent in other regions . This reflects unique factors such as a solid harvest in India, a hog population rebound from a recent swine flu epidemic in China, and contained increases in rice prices. By contrast, lower inflation in Asia’s advanced economies reflects a different set of factors. The region has enjoyed more muted energy inflation than Europe and the United States.

Finally, some Asian countries managed the pandemic in a way that avoided major supply disruptions and the associated pressure on prices. Korea embraced comprehensive contact tracing and testing, for example, while Australia and China contained infections with border closures and localized lockdowns.

Broad inflationary pressures will eventually moderate globally, as supply-demand mismatches ease and stimulus recedes. But in 2022, as the recovery strengthens, the persistent impact of high shipping costs could put an end to the benign inflation Asia has enjoyed in 2021. One benchmark measure of global shipping costs, the Baltic Dry Index, tripled this year through October: our analysis shows such large increases in shipping costs boost inflation for 12 months, which could add about 1.5 percentage points to the pace of Asia’s inflation in the second half of 2022.

The region’s policymakers must be ready to act.

License and Republishing

World Economic Forum Type may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

Check Also

What's next for bitcoin and crypto- The trends to watch in 2022

What’s next for bitcoin and crypto? The trends to watch in 2022

The debate on cryptocurrency is still raging, as countries decide whether to embrace, regulate or …

Leave a Reply