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News Analysis: As inflation stalks Asia, U.S. safe -- for now
Date: 2011/2/22 Click: 2012
While Asian economies risk overheating and an increase in inflation, the United States remains safe -- so far.

The International Monetary Fund has warned in recent weeks that Asian nations, while leading the global economy out of the worst recession in eight decades, must take measures to cool their rapidly heating economies and avoid inflation.

Meanwhile, on the other side of the Pacific, a number of factors are likely to prevent the United States from encountering the same inflationary pitfalls that now bedevil parts of Asia.

But longer term dangers loom on the horizon, which could put the United States on a path toward increased inflation, some economists said.

Among the potential bear traps are rising oil prices, which can at times cause inflation. While the cost of oil is far from the 150 U.S. dollars per barrel mark that economists say flags the danger zone, markets are closely eyeing events in the Middle East, as unrest spreads from Egypt to Iran, Bahrain and Libya.

Analysts fret that if political upheaval spreads to major oil exporters such as Saudi Arabia, a ripple effect could impact oil prices and U.S. markets.

Investor psychology could also produce harmful effects. Francisco Torralba, economist at Ibbotson Associates, a Morningstar Company, said that while countries such as Egypt are less relevant than Saudi Arabia in terms of oil supply and reserves, investors' jitters could push up oil prices, depending on what unfolds in the region.

Aside from Mid East unrest, longer term trends, notably increased demand from developing countries, could push up oil prices, said some economists.

Barry Bosworth, former presidential advisor and senior fellow at the Brookings Institution, said that if oil and food prices lead to higher wages, there will be negative effects on growth and intensified inflation worries in financial markets.

Terry Miller, director of the Center for International Trade and Economics at the Heritage Foundation, said that with the massive U.S. deficit, interest rates at historic lows and the Federal Reserve pumping money into the economy, inflation is almost a certainty in the United States.

Still, recent inflation increases -- averaging less than 1 percent over the last 24 months -- while significant, fall short of reaching levels considered dangerous.

"I'm concerned about the trend, but not yet alarmed by the levels," he said, adding that he expects inflation to rise to around 2.5 percent to 3 percent by the end of this year.


In Asia, however, inflation is fast becoming a near term concern, and worries over food price hikes mount as the region leads the global recovery from the worst recession in eight decades.

Speaking on Wednesday at the Carnegie Endowment for International Peace in Washington, top IMF economist Anoop Singh warned that emerging Asian economies risk overheating and inflation.

The IMF Asia and Pacific department director urged governments in the region to normalize fiscal and monetary policies to deal with the risk of overheating, as well as ensure that growth is balanced and sustainable.

"It is not enough for us to have a strong recovery," he said. "It must be sustainable and it must have the right quality."

"Asia has significantly lowered poverty in the past decades and, looking ahead, the growth momentum must ... address rising concerns in some countries about income disparities," he said. "In the near term, rising global food prices are an important issue in many countries."

While food prices have in recent weeks been on the rise, Singh added that core inflation is also creeping upward in some countries.

"Our sense is that core inflation is also rising in some parts of the region, and we see risks of spillovers into generalized inflation," he said.

Rising property prices in the region are also stoking concern, he said. While price pressures in some countries have lessened in recent months due to government intervention, real estate booms have prompted worries in regional economies.

"There is the risk in some countries of property bubbles developing," he said Singh.

Surging capital flows into Asia over the past year are another concern, he said, adding that they need to be managed carefully.

In 2009 and 2010, capital flows into emerging Asia reached more than 200 billion U.S. dollars, following a net exit of foreign capital in 2008, he noted.

Bosworth said inflationary pressures could derail the recovery in some developing countries, and added that many will need to tighten on their monetary policy or allow their exchange rate to rise, which will slow their growth.
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