How Asian Inflation Will Choke U.S. Economy

Monday, March 3, 2008 4:24 p.m. EST

Inflation worries everyone in the U.S., except possibly Fed Chairman Ben Bernanke, yet rapidly rising inflation in Asia has barely been noticed.
Nevertheless, high Asian prices could lead to an even weaker dollar, forcing interest rates on Treasury bonds higher.

It could force the Fed to raise short-term rates as well.

Some analysts foresee a simple scenario: If Asian inflation accelerates, Asian policymakers will let their currencies appreciate to contain it.

As their currencies appreciate, however, they will be less able to buy U.S. securities, at least in the volume they have so far.
Less demand will lead to lower bond prices and higher interest rates to compensate.

It’s already happened in India. In 2007, the rupee was very strong, gaining 11 percent against the U.S. dollar. The rising currency was partly responsible for Indian inflation falling to an acceptable level of 3 percent in the second half of the year.

But in recent months, inflation in India has turned higher again.

"Inflation is likely to rise further as the fuel price increase percolates down to other sectors of the economy in the coming weeks," said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the Indian unit of Standard & Poor's.

China reported a year-over-year 7.1 percent gain in consumer prices in January, the highest inflation rate in more than a decade.

In Singapore, CPI growth accelerated to 6.6 percent a year in January, the fastest pace since 1982.

Although inflation rose by only 0.8 percent in Japan, it was the highest experienced in that country in a decade. In 2007, Japan experienced inflation for the first time in this century.

"We should not be surprised to see Asian currencies rise more aggressively in the near future,â€