Source: The Wall Street Journal Asia                Date: 10 November, 2010

While the U.S. Federal Reserve has taken flak for embarking on a new round of bond buying to get the U.S. economy moving again and avoid deflation, in Asia the worry is that central banks aren't doing enough to fight the opposite problem: inflation. Despite strong growth rates, most of Asia's biggest economies have taken only limited steps to tighten monetary policy. The International Monetary Fund estimates emerging Asian economies will grow 9.3% this year.

China has raised interest rates a quarter of a point and reined in bank lending. South Korea has raised its interest rates once, but economists don't expect it to move again until 2011. Indonesia hasn't moved at all since it slashed rates during the global financial crisis a couple of years ago.

Core inflation, which excludes volatile food and energy, has stayed tame in the region with the exception of India, which has had to raise interest rates several times but has now signaled it is taking a breather. Examples of prices moving higher than central bankers would like, such as South Korea's 4.1% year-on-year increase in October, were blamed on temporary factors, in this case a surge in the price of kimchi, the pickled-cabbage staple of Korean diets. Economists there figure that headline inflation will cool in coming months as food prices moderate, thanks to better harvests.

But looking ahead, there are reasons to worry that interest rates are too low across much of developing Asia. Unlike in the U.S. and Europe, output gaps, which measure whether economies are growing at full potential, have closed everywhere but in Japan. That indicates pricing pressure is building as demand for goods and services outstrips supply. Also, commodity prices are rising, and massive flows of capital attracted to Asia puts pressure on asset prices, especially housing. The worry is that while the focus is on these narrow asset price bubbles, inflation could quickly materialize, eliciting fast and furious rate increases that would whipsaw growth and sink markets.