Asia’s inflation has peaked, suggesting that central banks will not need to hike interest rates to the extent expected by markets, Morgan Stanley said.
“Deflating global goods demand, improving supply chains, falling commodity prices and limited wage pressures suggest to us that Asia’s inflation risks have peaked,” wrote economists led by chief Asia economist Chetan Ahya in a July 6 note. “Inflation could start to surprise on the downside in the coming months.”
Markets are pricing in a more hawkish outcome on interest rate hikes than is warranted, Ahya said, adding that the level of interest rates needed to slow growth and demand will not be as high as is being perceived by markets.
“With growth concerns now coming to the fore and perhaps taking some precedence over inflation risks, we think it has reduced the risks that central banks in the region will have to go deeply into restrictive territory as implied by market pricing,” he said.
Global Demand Decreasing
Global demand is now decreasing, many supply chains that were struggling have been restored, and inventory levels are rising, suggesting that lower inflation will follow, the report said.
Oil prices have fallen 10% in the past week and non-oil commodity prices, including food, are down 40%, reducing pipeline inflation pressures, they added.
Global food prices, which have a large weightage in CPI baskets in the region, have also rolled over meaningfully, alleviating pricing pressures, the report said. The prices of global food grains such as wheat and fertilisers have declined by almost 30% since reaching their previous peaks, they said
Services inflation may stay firm as economies reap the fuller benefits from reopening but as growth is slowing it will lead to weaker job gains, capping wage growth, Ahya said.
- Alfie Habershon