• Government stimulus, accumulated household savings and a backdrop of very cheap borrowing (both in Asia and globally) have generated additional demand. As vaccine rollouts facilitate economic normalisation, prices will be subject to upward pressure.

• The Economist Intelligence Unit still holds a relatively benign view on the inflation outlook for Asia’s major economies, owing to factors including labour market dislocation and downward trends in food prices. However, risks to our forecast are tilted to the upside.

• A rapid acceleration of global or local inflation could force central banks in the region into an earlier than expected tightening of monetary policy. This would undercut a fragile economic recovery and cause financial market disruption.

Consumer price inflation in Asia is about to jump. Part of this acceleration will be mathematical, as year-on-year comparisons in the consumer price index (CPI) will include the deflationary shock of the coronavirus (Covid‑19) pandemic in the first half of 2020. Deflation gripped the region in the wake of the pandemic, as consumers were told to stay at home and businesses ordered to close. Demand-pull inflation disappeared as spending shrivelled.

Since then many Asian governments have provided significant support to households. These measures have included cash handouts, cuts to consumers’ utility bills and wage-subsidy schemes. In some economies, the consequence of extra state income and reduced spending opportunities has been a big increase in household savings; for example, Japan’s saving rate exceeded 40% for much of 2020, against a pre‑coronavirus trend of 20‑30%. This points to the potential for a release of pent‑up demand, as economies normalise, that could push up prices.

Alongside this, central banks have been very active on the supply side, with ultra-loose monetary policy reducing borrowing costs in an effort to persuade firms and households to spend and invest. Credit jumped across most major Asian economies in 2020, and such a trend typically leads to higher inflation.

Commodity, shipping and housing prices are rising rapidly

In some sectors the impact is already clear. In Australia and New Zealand cheap borrowing costs have increased house price inflation. The housing price index calculated by the Real Estate Institute of New Zealand was up by 21.5% year on year in February. In Australia, prices recovered from a bout of deflation in 2019 (triggered by economic deterioration) to rise by an average of 6% year on year in the first three quarters of 2020, with anecdotal evidence suggesting faster growth in early 2021. These rises will creep into the rental costs included within CPI baskets.

Another visible driver of inflation is a rise in global shipping costs. The imposition of lockdown measures has caused chaos in the freight transport industry, with demand shrivelling in some markets (such as Europe) and coming back quickly in others (like China). Shortages of empty containers in Asia have caused a global index of shipping costs to rise by around 200% since the onset of the pandemic. Some costs, especially for high-volume, low-price items, will be passed on to consumers in the form of higher prices.

Inflationary pressures will also stem from higher global energy prices. A year ago OPEC and its partners failed to agree on cuts in oil production, resulting in tumbling prices even before the big hit to energy demand during the lockdown phase of the pandemic. This year has been a different story. In March OPEC and Russia chose to maintain constrained supply, much to the surprise of world markets, in a bid to drive up prices. This means that consumers in major Asian importers, including China and India, will pay more for their fuel. We expect the global price of crude oil (dated Brent blend) to average US$68/barrel in 2021 compared with US$42.3 in 2020.

Deflationary pressures will stem from labour market dislocation and food prices

At the same time, there are also reasons to be sanguine about inflation. The biggest of these is the destruction of labour markets that took place during the pandemic. The International Labour Organisation estimates that 81m jobs were lost in Asia in 2020, and while some governments have launched the most comprehensive protections against loss of income in their history, others have not, especially in economies with large informal sectors. While inflation could be pushed up by the pent-up demand of those who were able to maintain their incomes during the pandemic, it will be subdued by the cutbacks made by those who were not.

We also note that there are major differences in the speeds at which governments are rolling out their vaccination programmes. Our current forecast is that only a handful of Asian economies will have vaccinated 60% of their population by end‑2021. Although we expect coronavirus-related disruption to be minimal in some other countries whose vaccine rollouts will take longer, such as Vietnam and China, a temporary suspension of economic activity is still likely this year in the rest of the region. This will dampen demand-pull inflation.

Finally, supply-side factors (such as those linked to food prices, which are weighted heavily in the CPI baskets of emerging Asian economies) will offset some inflationary pressure. While Chinese consumer demand has normalised, we forecast that consumer price inflation in the country will decelerate to 1.6% in 2021, from 2.5% last year. This is the result of a rise in the supply of pork—a consumer staple—following the disruption caused by an epidemic of African swine flu. Inflation in India is similarly expected to moderate at 5%, from 6.6% in 2020, helped by a good domestic harvest. Comparable dynamics are expected in Pakistan and Vietnam.

The sharpest accelerations in inflation will be mainly experienced in developed Asia. Consumer price inflation in Australia, Hong Kong, Singapore, South Korea and Taiwan is forecast to accelerate by between 0.5 and 2 percentage points in 2021. This will reflect strong pent‑up demand, a higher weighting in CPI baskets for items such as housing, and reliance on imported consumer goods that are sensitive to shipping costs. Even then, these increases are still reasonably moderate, and the re‑emergence of firmer inflation will be welcomed in many countries as a sign of improving economic health.

An inflation surge would upset the economic recovery

While the outlook for inflation in Asia is still benign, we see risks as mainly on the upside. As such, businesses should be considering the implications of higher prices in case they materialise. Among the risks is the possibility of central banks in the region being pushed into an early tightening of monetary policy. This could be in response to local price pressures, or to guard against the financial effects in Asia of policy tightening in the US or Europe. However, we currently assume that no major Asian central bank will increase its policy rates in 2021.

Extraordinary government stimulus, company valuations, corporate borrowing and private spending are all predicated on the idea that money is cheap and will remain so. An abrupt shift in monetary policy would therefore cause significant disruption in regional financial markets and undermine the fragile economic recovery that is in progress. Government borrowing to fight the pandemic would become more expensive and consumer spending would weaken. As such, having long presented little significant economic risk, inflation trends will be worth careful observation in 2021.

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