SINGAPORE, September 10 — A second inflation shock is building across Asia while the region’s economies are still absorbing the first, according to an Economic Letter published by economist Tian Yong Woon on September 7. The letter, titled “Shock and Boom” and issued in the Economy in Brief series, weighs Asia’s mounting supply-side price risks against the artificial intelligence export boom that continues to power regional growth. The first risk is familiar.
The US-Iran conflict escalated once again over the weekend, with both sides trading strikes, carrying the confrontation well into its sixth month. Crude oil prices have risen and measures of geopolitical risk remain elevated.
Woon’s assessment of the oil channel is notably measured. Should crude hold at current levels without advancing further, base effects should eventually pull that impulse out of inflation. If prices stay at current high levels for at least another six months without advancing substantially further, base effects will pull them out of inflation calculations.
The mechanism is arithmetic rather than relief.
El Niño arrives, and the food channel follows
The second risk is the one that would seem to carry the longer tail. El Niño is already under way, and many authorities have touted it as probably the biggest one yet. Indicators including the Southern Oscillation Index have been signalling it strongly for months.
Impacts are already showing through. Sea surface temperatures are rising, and wildfire risks have increased in parts of Southeast Asia.
Rainfall is being redistributed, greatly increased in some areas and greatly reduced in others — a pattern that stands to disrupt crop production and bring about an adverse food supply shock that could send food price inflation surging soon. For a region where food carries a heavy weight in household budgets, that is the salient point. Oil shocks fade through base effects.
A harvest does not come back once it has failed.
Bonds are repricing, but not for the reason usually given
Markets have started to price these risks in through higher yields. Japanese government bond yields have surged alongside global peers, also pushed by fiscal concerns as the budget is drawn up. Domestic buyers have reduced their net sales of JGBs, with the 10-year yield now flirting with 3%.
Woon’s reading of the move is worth dwelling on. The recent rise in global bond yields looks driven less by inflation than by real yields, as markets confront the prospect of heavier fiscal spending, capex-intensive investment paths and the issuance needed to fund them.
Inflationary risks are compounding that repricing rather than leading it. Set against these pressures, advanced Asia’s AI buildout continues to run apace. Producers of critical AI chips in Japan, Taiwan and South Korea are posting double and triple-digit export growth.
The focus is also broadening from AI infrastructure towards physical applications such as humanoid robots. China has benefited too, with integrated circuits and computer equipment contributing about half of its export growth.
The remainder has come from other goods, including electric vehicles, amid a still-robust overall export trend. By region, ASEAN-6 and India have driven that growth, offsetting the steep fall in shipments to the United States. That success, however, has again deferred China’s longer-term rebalancing towards consumption — the adjustment Beijing has promised for years and postponed for just as long.
What to watch next is whether El Niño’s rainfall redistribution translates into actual crop losses over the coming planting cycle, and whether oil holds its current range long enough for base effects to do their work. On present evidence, Asia’s export engine is running hard enough to mask a good deal. It cannot mask a bad harvest.
