Headline inflation across most economies worldwide moderated in the first half of 2023 due to a highly synchronised and intense tightening of monetary policies. However, much of the cooling in inflation is attributed to the decline in commodity prices and the easing of pressure on global supply chains as the impact of external shocks, such as pandemic-related activity restrictions and Russia’s invasion of Ukraine, has diminished. Price levels in most jurisdictions remain elevated, and core inflation figures are still above target. The rate of inflation in the United States is at 3.2% in July, still higher than the Fed’s benchmark target of 2%, while the job market is gradually slowing down. The rate of inflation in the Euro area, at 5.3% in July, is more than the European Central Bank’s medium-term target of 2%. Average headline and core inflation in the OECD member countries is higher than in most countries in Emerging Asia (Table 2). The advanced economies are therefore likely to raise policy rates further or maintain a tight monetary stance this year. This poses a major risk to Emerging Asia’s efforts to sustain economic growth momentum while ensuring price stability.
Economic Outlook for Southeast Asia, China and India 2023 - Update
Monetary policies will remain tight amid high inflation and upside risks
Table 2. Consumer price inflation and core inflation in the OECD and Emerging Asia, July 2023
Note: Latest data as of July 2023. OECD average and Cambodia data as of June 2023. Brunei Darussalam CPI data as of May 2023; Myanmar data as of July 2022.
Source: CEIC.
Meanwhile, inflation in Emerging Asia is more restrained than elsewhere on the back of governments in the region actively implementing policies such as subsidies, export restrictions, tax cuts and price controls to contain the impact of rising global food and energy prices (OECD, 2023). Recent estimates show headline inflation declining, although the rate of decrease varies across the region. Core inflation is proving stickier and appears to be either stabilising, as in Indonesia, or surpassing the level of CPI inflation, as in Malaysia, Philippines, Thailand and Viet Nam (Figure 6). In India, headline inflation projection for fiscal year 2023-2024 has been revised up to 5.4% owing to the recent upsurge in food inflation fueled by the price shock from vegetables. Core inflation remains high due to sticky prices in sectors such as clothing and footwear, health, personal care, education, and household goods and services. Malaysia’s headline inflation is expected to moderate, though, the gap between core and CPI inflation continues to widen. Inflation in Singapore and Thailand is expected to moderate, but core inflation remains elevated. Meanwhile, Indonesia has performed better than other economies in the region, with inflation forecast to be within the central bank’s target range of 3.0% ± 1% in 2023.
Monetary policies will remain tight given that the region will continue to exhibit robust domestic demand, underpinned by solid labour market expansion and rapid growth in the services sector. The threat of weather-related disturbances due to El Niño could exacerbate the problem and push food inflation higher. Upside risks to inflation that persist outside the region include tight financial conditions, geopolitical tensions, and uncertainty over the future trajectory of monetary policy in advanced economies.
Figure 6. Consumer Price Index and core inflation in selected Emerging Asian countries, January 2021 to July 2023 (%)
Note: Data for China, India, Philippines, Singapore, Malaysia and Thailand as of June 2023.
Source: CEIC.
A recent report from the Bank for International Settlements suggested that the factors that initially triggered the surge in inflation have weakened and been replaced by mounting prices for services. This rise of services as the main driver of inflation has become evident in the United States and other advanced economies, as well as in Latin America and Emerging Asia, and is likely to persist in the near term. In Emerging Asia, services inflation is expected to be anchored to the region’s expansion of the services sector and is likely to persist.
On a positive note, previous monetary policy actions are yielding the desired results, and barring upside risks, most monetary authorities are well on the way to anchoring inflation expectations. The threat of a wage-price spiral in the region is counterbalanced by the continued implementation of public policies aimed at increasing disposable income. These policies include personal income tax cuts in the Philippines; household power subsidies in Thailand; subsidies for essential goods, fuel, and electricity in Malaysia; and housing and public health care subsidies in Singapore.
Looking ahead, it is imperative to have clear public communication of tightening measures in the face of upside risks to inflation. This also minimises the uncertainty of future path of monetary policy and helps to improve forecasts of the monetary authorities’ objectives and understanding of the rationale behind their policy decisions.