Think tank downplays risk of stagflation in Asia-Pacific

MANILA, Philippines — The Philippines and other countries in Asia-Pacific remain insulated from stagflation as inflation in the region is still manageable amid the gradual recovery from the COVID-19 pandemic, according to Moody’s Analytics.

In an economic setting, stagflation refers to persistent high inflation combined with high unemployment and stagnant demand.

Steven Cochrane, chief economist for Asia-Pacific at Moody’s Analytics, said inflation exceeds four percent only in the Philippines and India but falls below two percent across much of the region.

“The region remains far from stagflation. Inflation is well below the double-digit rates of the late 1970s and the bouts of high inflation in the 1980s and 1990s,” Cochrane said.

He pointed out that global and regional gross domestic product (GDP) growth, while currently slowing, is nowhere near the zero to one percent rates that the economy approached several times in the 1980s.

“Asia-Pacific joins the global recovery, inflation risks will accelerate as demand rises, with no end in sight to supply-chain bottlenecks in the near term. So far, however, inflation still appears manageable,” he added.

Inflation in the Philippines averaged 4.5 percent from January to September, exceeding the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP) for 2021 to 2023.

After hitting a 32-month high of 4.9 percent in August, inflation eased to 4.8 percent in September and is seen returning to within the BSP target toward the end of the year.

“Inflation is above central bank targets in Australia, the Philippines, New Zealand and South Korea, with policy tightening now underway in the latter two, as well as by the Monetary Authority of Singapore, as it slightly raised the slope of the nominal effective exchange rate in a bid to ensure price stability while keeping its eye on the economic recovery,” Cochrane said.

After emerging as one of the strongest currencies last year with an appreciation of more than five percent, the peso is now one of the weakest currencies in the region after depreciating against the US dollar and ranging between 50 and 51 to $1 over the past month.

“There is good reason to expect that foreign exchange volatility may remain modest in the coming year if inflation persists and as more central banks move to normalize their policy rates,” Cochrane said.

According to Moody’s Analytics, consumer price index volatility has risen in the Philippines, Thailand and Vietnam but is stable in Indonesia.

For his part, BSP Governor Benjamin Diokno said he is part of “Team Transitory” as inflation is seen to ease back to within the target at 3.3 percent in 2022 and 3.2 percent in 2023 after accelerating past the target range at 4.5 percent this year.

Diokno said there appears to be no justification for monetary intervention since the inflation pressures are coming from the supply side brought about by the impact of weather disturbances and prolonged African swine fever on the prices of key food items as well as the rise in world commodity prices due to strong demand versus supply chain bottleneck.

“To me, the harm from tightening monetary policy too soon exceeds the harm of moving too late, given that the Philippine economy is at its nascent state of economy recovery,” Diokno earlier said.

Cochrane said policy rates are expected to remain stable in most of Southeast Asia, Australia and India through mid-2022 as policymakers focus on continued economic recovery while the region emerges from its Delta wave mobility controls.