Macquarie Research:: Asian Macqro forecasts: Commodity price sensitivities

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Asian Macqro forecasts


Commodity price sensitivities
Slower growth in CY11
This report contains detailed forecasts for the economies that we cover across
Asia, and the latter section sets out the prospects for individual economies. We
see activity slowing significantly in CY11–12 after the post-crisis rebound of
2009–10. Much of this reflects the base effect but policy tightening is helping to
slow growth and limit inflation risks.

Inflation is unsurprisingly the main risk heading into the third year of cyclical
recovery, especially considering the strength of commodity prices. We have
raised our inflation forecasts for CY11, largely on the back of an upgrade in our
view on global commodity prices, particularly oil.

Inflation risk from commodity prices
Analysing the sensitivity of consumer price inflation to global commodity prices is
not as simple as looking at the proportion of spending on food and energy in
each economy. A range of factors, such as exchange rates, tariffs, subsidies,
policy adjustments, pass-through rates, institutional structures and the state of
the economic cycle, can all affect the impact from commodity price changes.

Correlations are relatively low
The correlations between commodity prices and core inflation are relatively low
on a 10-year basis, but much higher than over 20 years. This is a useful
reminder that currency swings (as in 1997–98) can have a more pronounced
effect on inflation than commodity prices. China has the highest correlation
between commodity prices and inflation over the past decade.

Asia unlikely to drive global inflation
Contrary to common perceptions, most academic studies struggle to find
evidence that the emergence of China has been a significant factor behind
restrained inflation in the developed world in recent years. By a similar argument,
higher inflation in Asia should not make much of a contribution to the G3’s fight
against the threat of deflation.

There is potential for an impact via regional demand driving global commodity
prices but even that typically does not have a persistent effect on G3 inflation. In
part, this is because it can cut real spending power and depress demand.

Policy tightening to continue

Signs that the pace of regional growth has reaccelerated mean that any
commodity price pressures will be adding to tight domestic capacity. However,
underlying inflation remains relatively subdued, so our expectation is for a steady
pace of tightening, rather than anything particularly urgent and disruptive.