Asian countries gauge their inflation through the rear-view mirror

By Emily Kaiser, Reuters

SINGAPORE — Depending on where you look, Asia’s inflation is either benign or stubbornly hot. China’s March inflation rate stayed below Beijing’s 4-percent target and appeared to be on a softening trajectory, and South Korea’s dropped to a 20-month low. But other figures show price pressures actually picked up last month, and factories paid more for raw materials. The disconnect stems from the way inflation is measured. The primary indicator in many Asian economies compares prices against a year earlier, not the prior month as is common in the United States and Europe. That can be misleading. Asia’s inflation looks tame now largely because prices were high a year ago, when oil spiked because fighting in Libya threatened supplies, and shortages of pork and other food drove up costs. Economists call that the base effect. Central bankers trying to calibrate interest rates need to know where prices are headed, not where they’ve been. Otherwise, they risk missing the warning signs of a build-up in inflation that will only become harder to contain.

“The month-on-month data gives you a better gauge of the inflation pulse, what’s happening right now,” said Rob Subbaraman, chief Asia economist for Nomura in Hong Kong. “I’m a little bit skeptical of looking too closely into the year-on-year numbers now.” Each data set has its limitations. Few of the statistics agencies in Asia adjust data for seasonal factors, such as the Lunar New Year which distorts month-on-month readings in China and some neighboring economies every January and February. Comparing year to year solves that problem, but introduces another set of concerns over base effect and timeliness.