Instability in Asian Inflation

All through the summer and well into the fall, the data science teams at Premise have seen Asian economies struggle with inflation — though if you’ve been looking only at the headline numbers, you might have missed it. As recently as this past week, the National Bureau of Statistics of China reported that consumer prices rose 0.1 percent month-over-month, underperforming economists’ predictions of a 0.2 percent increase. A modest number, to be sure, but one that tells only part of the story: since early July, the teams at Premise have seen vegetable prices in China rising at a rapid clip.

china vegetable index

premise — china vegetable index

It’s a reminder that prices in emerging markets are hardly as stable as those of us in developed economies might expect — and also that instability may come from the most innocuous places. While inflation is usually far from the minds government officials in the West, bankers and policymakers in Asia often face the unenviable task of combating rising prices in vitally important market areas. A failure to do so could have disturbing consequences: in 2010, more than a thousand students in Guizhou province responded to rising food prices by rioting in their school cafeteria, leaving behind a “chaotic scene” with smashed doors and shattered glass. “Inflation is politically volatile in China,” wrote the South China Morning Post, “because it erodes economic gains that underpin the ruling party’s claim to power.”

India, too, has seen its share of food inflation this year, and with similarly dangerous outcomes. Since the early summer, the Premise data science team has tracked the rising price of onions with keen interest. A staple of Indian cuisine, inflation in the root vegetable’s prices has the power to change the course of a nation: in the country’s 1998 elections, the ruling Bhartiya Janata Party was unceremoniously booted from office in an outcome blamed on the skyrocketing price of onions. Onion prices played such a large role in the 1977 Indian elections that former prime minister Indira Gandhi called it the onion election.

onions in india

As the price of onions and other vegetables continued to rise this summer the rupee weakened, almost as if in lockstep. The exchange range shot up, from around 60 rupees per dollar in June to almost 70 rupees per dollar by August. Most frighteningly, social unrest in the country became stronger. In August, a truck carrying 9,000 kilograms of onions was stolen in a robbery that an Indian police officer, Bhawani Singh, told the New York Times was unlike anything he had ever known to happen.

india vegetable index

premise — india vegetable index

Given the political and social upheaval that has been known to accompany such increases in vegetable prices, these price adjustments can lead to market moving events. At the end of October, more than three months after Premise first saw vegetable prices begin to increase, Raghuram Rajan, Governor of the Reserve Bank of India, raised the repurchase rate to 7.75 percent from 7.5 percent. In what was likely a response to the rate hike — at least in part — the yield on 10-year bonds issued by the Indian government fell 12 basis points to 8.54 percent. In a statement, Rajan reiterated the importance of “break[ing] the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth.”

For anyone interested in Asian markets and their fiscal and monetary policy authorities, it will remain vitally important to watch how food prices move in the coming months. At Premise, we’ll certainly be keeping an eye on these changes: when price movements can have the kinds of stark effects on fiscal and monetary policy that we’ve seen this year, it’s imperative that we know what’s happening.

As data scientists, economists, and knowledgeable professionals, it’s crucial that we recognize that inflation is not created equally across the world. Though changes in the prices of food and vegetables are often overlooked in developed countries, for those in emerging markets — whether they are policymakers, students, or working professionals — nothing could be more important.