The View | Why Asia’s CEOs fear inflation as biggest hurdle to coronavirus recovery

Supply-side constraints, loose monetary policy, geopolitical tensions and weakening consumer sentiment are just some of the issues weighing on business leaders’ minds

Asia’s economic vitality means it will remain a leading source of growth in the future, but expect more bumps on the road to recovery

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People rush to buy food at a market in Mong Kok as Tropical Storm Kompasu nears Hong Kong on October 12. CEOs in Asia fear that rising prices could dampen consumer sentiment. Photo: Dickson Lee

Published: 5:00pm, 19 Oct 2021Updated: 6:25pm, 19 Oct 2021

The International Monetary Fund last week called on central banks to watch out for persistent inflationary pressures but said it was too early to talk about stagflation. From the perspective of business, though, worries about stagflation are already here.

In a recent survey of Asia-based CEOs conducted by the Asia Business Council, nearly 40 per cent of respondents believed that inflation – driven by supply-side constraints and loose monetary policy – would be the biggest economic challenge over the next year. That is up from just 7 per cent of respondents in last year’s survey.

Even in mid-2009, when 67 per cent of respondents surveyed thought economic conditions would improve in the next 12 months, only 18 per cent saw inflation as their primary concern. That was the second-most optimistic year on record since the survey began in 2006.

The increased concern this year suggests recent price rises are not just the side effects of an overheating economy, which would be expected as the world recovers from a crisis of the magnitude of the Covid-19 pandemic.

There is evidence that the inflation expectations of businesses are good predictors of actual future inflation. As the IMF warned, there is cause for concern if companies and workers expect inflation to linger, which could feed into a cycle of wage increases and higher prices.

That this inflation is driven at least in part by supply-side constraints makes it more challenging to address. The typical response to inflation – tighter monetary policy – cannot solve these structural issues.