As the global economy continues its slow and bumpy recovery, there are concerns inflation in emerging Asian nations could spark another meltdown.
The International Monetary Fund (IMF) is worried surging inflation in the powerhouses of China, India and other smaller nations could derail initiatives to keep global financial stability in check.
The World Bank has cited rising food prices in Asia and its president is warning the world is one shock away from a full-blown crisis.
IMF managing director Dominique Strauss Kahn says food and fuel inflation has the potential to create a dangerous bubble.
“In emerging countries, the question is more of overheating,” he said.
“Food and fuel prices may have an influence, but the risk of inflation, which becomes a concern, comes from the fact that most of them reach their potential growth and so the risk of overheating becomes real.”
But World Bank president Robert Zoellick says food inflation in Asia is more than just a looming concern.
“Already 44 million people have fallen into poverty as a result of rising food prices over the last year,” he said.
“We estimate that a further 10 per cent rise in the food price index could put 10 million more people into poverty.”
Mr Zoellick sees food inflation as a potential trigger to a new phase of the global financial crisis.
“This is the biggest threat today to the world’s poor where we risk losing a generation,” he said.
“We are one shock away from a full-grown crisis. The financial crisis taught us that prevention is better than cure. We cannot afford to forget that lesson.”
Fariborz Moshirian, professor of finance at the University of New South Wales, can see a disturbing and potentially destabilising trend across Asia.
“At the moment in India we are facing high inflation because the economic activities is around 8 per cent,” he said.
“We are seeing now inflation in China is almost out of control where they were expecting 4 per cent inflation 2011, now is getting almost close to 6 per cent.
“At the same time we are seeing some smaller economies such as Indonesia showing some sign of inflation.”
But Professor Moshirian does not believe food inflation will spark a new crisis just yet and points to the seemingly unstoppable rise of consumer expectations across middle-class Asia.
“It will be a matter of wait and see simply because in Asia we are looking at 800 million middle-income consumers who have capacity to buy regardless of their average inflation,” he said.
“At the same time they are receiving massive foreign capital which is adding to their purchasing power.”
Central banks in China and India have already followed Europe in raising official interest rates to curb inflation, and on Sunday China raised the reserve requirements it places on banks for the seventh time since November after headline inflation hit 5.4 per cent last week.
Professor Moshirian says the problem will persist until Asian nations agree to a coordinated approach on monetary policy, similar to the way the European Central Bank calibrates the economies of eurozone members.
“In Asia we are faced with national-based monetary policy and therefore each country is setting its own currency value as well as obviously facing their own inflation,” he said.
“A consequence of that is that you are seeing on the one hand China, with a fixed exchange rate not willing to be more flexible on its exchange rate.
“At the same time, countries like South Korea, like India, they are having a different policy set, and this lack of coordinated monetary policy is adding to the pressure on inflation and also capital flow to the Asian economies.”
Professor Moshirian says a coordinated monetary policy is possible.
“If they fast-track the process of south-east Asian dialogue, there is more chance for Asians to have more prosperous economies if their national monetary and fiscal policies are coordinated at a regional level,” he said.
