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Australian inflation will decouple from the Western world...

Christopher Joye
21 February 2011

HSBC obviously have a few fine economists. We know their local chief economist, Paul Bloxham, who is top notch. And yesterday their Asian co-head of economic research, Frederick Neumann, published an outstanding little piece on Asian inflation. I have excerpted the charts below.

Neumann's key points were:

(a) Setting aside commodity and food driven inflation, Asian core inflation is on the rise.

(b) Core inflation is now bumping up against or above central banks' targets.

(c) Crucially, core inflation in Asia started decoupling from the G7 economies nearly a decade ago. That is, Asia is emerging into an economic centre that can generate growth (and inflation) independently of the G7 countries (this is related to the Asian middle class story and the political imperatives in China).

For some time now, I have been arguing here that Australia has developing country characteristics and is really an Asian nation from an economic perspective. Our largest trading partners are China, Japan, South Korea and India. Long story short, get set for Australia to start importing Asian inflation in addition to domestically-generated price pressures. This is HSBC Neumann's introduction (and his charts):

“Everyone’s talking about commodity prices. But the chatter is missing the real story: core prices are rising sharply as well. And that’s what central banks really need to worry about. Food price spikes, obviously, may be due to a number of factors, not all of which require a vigorous monetary policy response. But, when core starts to move, something needs to be done: it unequivocally signals that demand is running too fast for comfort and that rising commodity prices are infecting the entire price chain. Sure, higher interest rates don’t put more rice or vegetables on the table or, for that matter, produce more oil, but they act as a fire-wall that prevents a more broad-based inflation spiral from erupting.”

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