By Leika Kihara
TOKYO (Reuters) – Asia is faring much better than other regions in averting a jump in inflation caused by supply shocks, and is less vulnerable to an unwelcome wage-driven spike in prices, Bank for International Settlements (BIS) head of research Hyun Song Shin said.
In the United States and Europe, a sharp increase in demand for manufactured goods has led to supply chain shocks and pushed up inflation as economies re-opened from COVID-19 lockdowns.
For these regions, the key to the price outlook would be whether the labour market will tighten enough to trigger a “wage-price spiral”, in which rising wages lead to entrenched inflation, Shin told Reuters in a recent interview.
As long as such wage-price spiral does not take off, price rises for durable goods would subside in the short-term, he said.
“But it’s a bit of a race against time, because if inflation persists, then of course this kind of inflation will feed into wage-setting,” he said. “If that’s sufficient to generate a kind of spiral, that would be an outcome we have to watch out for.”
The U.S. Federal Reserve has signalled a faster wind-down to its bond-buying programme on the possibility that inflation may not recede in the second half of next year.
Asia has been an exception and weathered the supply shock well with inflation “non-existent, very low”, Shin said.
One reason could be that companies in Asia maintained jobs more than their counterparts in other regions throughout the pandemic’s initial shock, allowing them to forgo wage hikes to lure back workers once their economies re-opened.
“One line of argument that’s important to look for is how the firm-worker relationship was maintained through the initial COVID shock” in Asia, Shin said.
“Those countries that maintained that relationship well have managed to navigate the challenges better.”
(Reporting by Leika Kihara; Editing by Alex Richardson)
