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Inflation hits Asian manufacturers despite monetary countermeasures

PMI readings for June suggest further interest rate hikes may be in order

Workers assemble steel bars at a construction site in India. PMI respondents cited steel as one of the main items subject to upward price pressure. (Getty Images)

SINGAPORE -- Rising prices are affecting manufacturers in emerging Asia despite central banks' recent attempts to control inflation, the latest Nikkei Purchasing Managers' Index shows. The results, economists say, suggest there is a possibility of further interest rate hikes in some countries.

The monthly PMI survey asks manufacturers in major Asian economies, excluding China, about changes in output, orders and other business conditions compared with a month earlier. An index reading above 50 points to an expansion of business activity, while a result below 50 indicates a contraction.

Overall manufacturing activity expanded in June in eight of the 11 economies monitored. Vietnam topped the region with a reading of 55.7 thanks to steady demand, followed by Taiwan's 54.5. South Korea and Malaysia showed contractions, with their figures coming in at 49.8 and 49.5, respectively. Myanmar marked 50.0.

A continued uptrend in prices despite monetary tightening stood out.

Central banks in Southeast Asia and India have raised interest rates in recent months, seeking to stabilize their currencies in the face of U.S. rate increases. A stronger dollar and weaker Asian currencies mean higher import prices for manufacturers, which they may have to pass on to product prices.

In India, the Input Prices Index -- one component of the PMI -- hit 58.6, the highest level since July 2014. Steel and fuel were the main items respondents reported to have increased in price over the month.

The four-year high was reached even though the Reserve Bank of India on June 6 raised its policy rate for the first time in four years by 25 basis points, to 6.25%, in an attempt to suppress inflation.

The PMI survey suggests that "the central bank could remain under pressure to tighten monetary policy," said Aashna Dodhia, an economist at IHS Markit.

In addition, India's Output Prices Index also rose to 52.2 in June, from May's 51.6. Capital Economics India economist Shilan Shah wrote in a July 2 report that the rise in the output price "strengthens the case for further modest policy tightening following the RBI's rate hike last month."

A similar trend was observed in the Philippines, which has raised interest rates twice since May. The Input Prices Index touched 64.0 while the Output Prices Index hit 55.1 in June, indicating continuous inflationary pressure on manufacturers.

"The depreciation of the peso, increased taxes, supply shortages, higher global commodity prices, especially for fuel, all contributed to inflation," said Bernard Aw, a principal economist at IHS Markit. "As a result, factory gate price hikes remained sharp, which could feed through to consumer inflation in coming months, thereby adding to expectations for further rate hikes."

The Philippines' PMI data jibes with the latest consumer price index. The Philippine Statistics Authority on July 5 announced that the country's headline CPI rose 5.2% from a year ago, while the core CPI, which excludes some food and energy products, rose 4.3%. Since this exceeds the country's inflation target range of between 2% and 4%, the Philippines could resort to another hike soon.

Indonesia's central bank, meanwhile, has raised its policy rate three times since May, from 4.25% to 5.25%. The country's Input Prices Index for June dropped to 56.6 from May's 60.0, but the reading shows that many manufacturers are still dealing with inflation.

Looking ahead, price pressure is likely to remain a key concern.

Indonesia's Future Output Index, a gauge of the production outlook for the coming 12 months, stood at 69.9 in June, marking the lowest since October 2012. India's was at an eight-month low of 58.1.

The escalating trade dispute between the U.S. and China is another concern for Asia's manufacturers, since many are links in the supply chains of Chinese businesses. Rising trade tensions between Washington and Beijing will negatively affect the economic growth of other countries, Indonesian central bank Gov. Perry Warjiyo said on Monday.

This puts central banks in a difficult position. Though the price figures suggest there is room for further rate increases, the banks may hesitate to tighten if the trade war threatens their economies.

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