Asia equipped with high levels of defences to weather El Niño, food inflation

However, the risks should not be understated.

Just a few, short weeks ago, headlines suggested that a powerful El Niño was developing in the Pacific Rim, but, fortunately, the latest forecasts are showing water temperatures returning to normal and increasingly lower probabilities of a serious El Niño event occurring.

According to a research note from HSBC Global Research, while the risks to Asian inflation don't end there, as a region, food prices should be able to weather the multi-directional turbulence.

This is due to several factors in the Asia region that manifest high levels of defences that can address the issue. However, the report noted that the risks should not be understated.

Here's more from HSBC Global Research:

Just ask the BSP (Bangko Sentral Ng Pilipinas) or the RBI (Reserve Bank of India): they have clearly expressed concerns that food CPI is too sticky.

In the Philippines, agricultural production is still recovering from last year as the new typhoon season sets in, which is partly why we expect the central bank to tighten next week.

In India, history shows that even a weak or moderate El Niño could correspond to a weak monsoon season, which would bring along widespread food and inflation disruptions.

In Indonesia, where Ramadan is coming to an end, food prices may face additional pressures – in the past on average a 1-1.5ppt increase in y-o-y food CPI.

Outweighing all of these concerns, however, is a positive commodity outlook and better regional ‘defences’.

Sure, headline-grabbing fish and dairy prices continue to rise. However, the broad CPI baskets will likely be under control due to plentiful rice stocks in Asia and near-record grain production overseas, especially in the Black Sea region, from where cheap wheat is being imported, according to Reuters, at a lower cost compared to the usual alternatives.