Asia Price rises, Euro Drop to Fan Eurozone Inflation

Asia price rises,euro drop to fan eurozone inflation

Thu Aug 14 18:46:36 PDT 2008



By Marc Jones

FRANKFURT, August 14 (Reuters) - Inflation-fighting European central bankers may be rejoicing at the 20 percent drop in oil prices, but a combination of soaring Asian prices and a recent sharp fall in the euro threatens to spoil the party.

A 7.5 percent drop in the euro against the dollar over the last month is making goods European firms source from abroad substantially more expensive, while high Asia-wide inflation is forcing up prices of goods from the region from t-shirts to TVs.

In China, inflation is over 7 percent, and while producer price data may show low single-digit increases, the impact is amplified by the fact that prices of Chinese goods were actually dropping until recently.

The story is the same across the region. Oil, food and commodity prices have tipped Indian inflation over 12 percent for the first time in 13 years. Indonesian inflation is at 12.2 percent, Philippine inflation at a 17-year high and in Thailand it has jumped to almost 10 percent.

As Asian suppliers push through price rises the whole world suffers but the fall in the euro over the last month is making life particularly hard for companies based in Europe.

That is because they usually pay big Asian suppliers in dollars and while until recently the euro's strength cocooned them from price rises, that protection is rapidly disappearing.

"The euro had risen very sharply against the dollar...this had a very substantial limiting effect on the impact of this Asian inflation pressure... but with the dollar now strengthening against the euro this now presents a greater risk," said Barclays Capital analyst Julian Callow.

"While we may have seen commodity prices moderate, paradoxically the impact of the weaker euro, if it were to continue, means we could be actually get more inflation pressure from Asian manufactured goods."

Evidence from European firms that Asian producers are upping prices is plentiful.

"In terms of suppliers... we have to accept increases due to inflationary pressure and wage pushes, which make products manufactured in Asia and elswhere in the world more expensive," German sportswear maker Puma's Chief Executive Jochen Zeitz said last week.

"All this has a certain impact on the cost structure of products. For 2009 we are now thinking about how to raise prices selectively."

And while the sharp drop in oil prices should cool inflation in the euro zone, higher pricetags on goods sourced from Asia would act as a prop.

"The euro area might get relief on the inflation front from weaker energy and food inflation but it might find core inflation is persistent and may ultimately push up higher partly because of this imported inflation on consumer goods," said Callow.



LONG FUSE

Other economists are more sceptical about the possible impact of Asian inflation on the euro-zone's harmonised index of consumer prices (HICP), running at 4.0 percent in July.

"Given the current structure of the HICP basket, assuming the euro trade-weighted index stays at current levels, I would say the impact (on inflation) would be quite limited, I wouldn't go above 0.1-0.2 percentage points," said UniCredit analyst Aurelio Maccario.

"The story would be different if we see an outright plunge in the euro but that is not our baseline assumption."

The key factor could be if Asian suppliers absorb some of the impact of home-grown inflation on their margins as the rapid slowdown in the United States and much of Europe tempers demand.

"I think the impact of the manufactured goods price inflation from Asia may be being dampened at the moment by the weakness in the U.S. economy. The full implictions of this might not come through until we see a more buoyant global economy again," said Callow.

Others back up that idea. Last month Goldman Sachs nudged down their Asian 2008 and 2009 growth forecasts calculating that the slowdown was starting to grip.

But most economists agree that while inflation in Asia will soon peak, it will remain a slow burning problem as rising personal wealth buoys demand, central banks keep accomodative interest rates and governments slash food and fuel subsides.

"While we see inflation possibly peaking in some countries in Q3 2008, we do not foresee the consumer price inflation receding back to benign levels anytime soon," Deutsche Bank analysts wrote in a recent note.

"We expect inflation to remain at elevated levels over the medium term, despite the decline in oil prices. Anecdotal evidence suggests that within 5 years, western-style salaries may be required in developing Asia to attract talent."



(Additional reporting by Eva Kuehnen; Editing by Gerrard Raven)


Succes in Business...,

Michael S. Thang
www.gojukai-indonesia.com