19 January 2016
Inflation rates have started rebounding in most low-cost countries, where authorities may prefer supporting a slowing down economic growth and let consumer prices more rapidly rising. The consecutive rise of nominal wages could however be offset by a fall of currency values, with sharp differences between emerging economies. Our monthly report offers a comparison of inflation rates in low-cost countries, with historical data available back to June 2007. Impact of currency changes vs the US dollar and the euro is also calculated to assess real terms of trade for exporters.
Inflation is rebounding in low-cost countries, which could eventually result in higher labour costs in the future.
In India for instance, the consumer price index has progressively risen from 3.7% in August to 5.6% in December, from a year earlier.
In Pakistan where inflation had been nearly erased, the CPI has bottomed out in October, reaching 3.2% in December, at still a low level, nevertheless.
In Turkey, inflation continues soaring, and rose to 8.8% in December, from a year earlier.
In Indonesia by contrast, the CPI has eventually declined after staying relatively high for a large number of months.
Indonesian inflation has dropped from 7.2% in August down to 3.3% in December.
For years, emerging economies have preferred progressively reducing their inflation through higher interest rates and credit tightening.
With the global economic growth now in danger, and especially in emerging countries, interest rates could be lowered in order to bring some support to decelerating economies.
A slowing down demand should reduce the inflation threats whereas much lower energy prices could also limit any rise in consumer price indices.
On the other hand, currency values could also decline against the dollar due to lower interest rates in low-cost countries and higher interest rates in the United States.
Inflation could also be boosted by a rebound in food prices, as impact of El Nino is negatively affect production, before being possibly followed by an El Nina year.
Given the high share of food in CPIs of low-cost countries, any rebound in prices is immediately felt by the population and workers.
Although higher inflation rates may result in higher wages in local currency terms, as a result, this could be offset by lower currency values.
As reflected by our below table, the impact of higher prices and wages may be reduced by currency changes.
In US$ terms, consumer prices have fallen in many low-cost countries in 2015. In euro terms however, they has sharply increased in many countries.