BEIJING - THAT banging sound across much of Asia is the stable door being slammed shut long after the galloping horse that is inflation has bolted.
Governments are resorting to everything from rice export bans to price controls to prevent an unprecedented spike in food and energy costs from metamorphosing into more generalised inflation.
Economists at Lehman Brothers count no fewer than 48 such trade and fiscal measures across Asia since the start of the year to counter what policy makers hope is a temporary shock.
Central banks are also soaking up liquidity and letting exchange rates appreciate.
Yet they are too late in many cases. Consumer prices are up by nearly 20 per cent from a year earlier in Vietnam and by more than 8 per cent in China and Indonesia. Inflation is just below a 26-year high in Singapore and rising worryingly fast in India.
If that wasn't enough of a headache, a shocking drop on Friday in profits at General Electric Co, a bellwether of the US and global economies, has underlined the risks to growth.
In short, Asian policy makers need to be mobilising for the next war, a potential slide in export demand, as well as calling up reinforcements for the current battle against inflation.
'The global economic and financial outlook is of grave concern. Global growth faces substantial downside risks in 2008,' Mr Zhou Xiaochuan, governor of the People's Bank of China, told a meeting of the International Monetary Fund and World Bank in Washington on Saturday.
SUPPLY SHOCK OR LOOSE MONEY?
Now, if the world economy does move down a gear, commodity prices should fall back too, especially as farmers are presumably planting more right now to cash in on sky-high prices. An end to Australia's drought should also help boost global supplies.
But what if the great commodity inflation is not a temporary supply shock? Many economists, not only monetarists, believe rather that Asia is finally paying the price for years of lax monetary policy and long-undervalued exchange rates and so are importing the inflationary stimulus imparted by a declining dollar and huge US current account deficits.
'We need to think about the fundamentals such as, say, the over-liquidity problem...which turned out to be inflationary at the end,' Mr Fan Gang, an adviser to the People's Bank of China, said on Sunday in Boao on the southern island of Hainan.
According to this school of thought, central banks might already have missed the chance to lean against the wind so as to prevent producers from passing on their higher input costs and workers from demanding higher wages to compensate.
'Second-round effects are starting to kick in in a number of countries, reflecting the fact that domestic demand has been still pretty strong in many countries,' said Mr David Burton, the director of the IMF's Asia and Pacific department.
'At the same time, we're seeing producer price inflation is now rising quite rapidly across many countries in the region, and that points to a compression of profit margins and the possibility of further inflationary pressure ahead,' Mr Burton told a news briefing in Washington.
Adding to the risks from commodity inflation are structural changes in big emerging economies such as India and China, where urbanisation is encroaching on arable land and rising incomes are fuelling demand for meat and dairy produce. Western subsidies for biofuels and global warming are also changing the food equation.
'The risk is that this time round there are more secular drivers of inflation,' said Mr Rob Subbaraman, chief non-Japan Asia economist at Lehman Brothers in Hong Kong.
'If it is more secular, fiscal/trade measures could do more harm than good because the longer it goes on, the more it exacerbates the supply/demand imbalance and the greater the risk of it feeding into inflationary expectations,' he said.
CURRENCY RESPONSE This may already be happening, prompting middlemen to hoard rice in India and Thailand, for example, in anticipation of ever-higher prices.
'The recent jump in rice prices in Asia, in the absence of any supply shocks, demonstrated how powerful inflation expectations could push up some prices instantaneously,' Mr Hong Liang, Goldman Sachs's chief China economist, said in a report last week. Some rice prices have doubled already this year.
So how should policy makers react? Subsidies and export bans merely muffle price signals, economists say, so governments would do much better to invest in rural infrastructure, such as cold storage and irrigation, and target handouts at the urban poor.
The poorest in society would be those hardest hit by a blanket tightening of monetary policy, said Glenn Maguire, Societe Generale's chief Asian economist based in Hong Kong.
'If food inflation has become an embedded dynamic and people have less money to spend on food, then raising interest rates to try to quell that seems a little perverse,' he said.
The appropriate policy response, he said, would be continued currency appreciation, which would cut the cost of food imports and generally tighten monetary conditions. 'That will be the most equitable way to handle these equity/distributional problems.'
Singapore did just that in decisive fashion on Thursday by effectively revaluing its dollar by at least 1.0 per cent.
Vietnam has widened the dong's trading band. And China has now let the yuan rise 18 per cent against the U.S. dollar since July 2005.
Of course, stronger exchange rates will eventually take a toll on exports. Which is why Asian central bankers are facing perhaps their toughest challenge since the 1997/98 financial crisis. - REUTERS
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