The last three months have been important ones for the inflation outlook. Real economic forces remain powerful with elevated service pricing trends joining ubiquitous cost increases and shortages in manufacturing. The Fed has increased its 2021 inflation forecast and started the process of steering markets towards the eventual removal of extreme monetary accommodation.

However, outside the US, service sector price pressures are weaker. Credit demand is lacklustre and one year on from the pandemic first wave and the one off boost it gave to borrowing, money supply growth is slowing. Recurrent Covid outbreaks have caused us to cut our 2021 growth estimates for half the Asian countries we forecast offsetting the advantage that rapid export growth would normally offer to a trade correlated region. Covid outbreaks, felt primarily on economic growth through reduced consumer spending, have flattened the rise in Asian inflation as well as growth. And, although the Fed sees inflation this year higher, it still sees it as temporary. On its forecasts, inflation falls again in 2022. We agree. Our Asian forecasts have inflation rising for around twelve months as commodity prices rise, but flattening out and then
falling in 2H22.

The effect of the pandemic on Asian economies means that rate increases from Asian central banks will be pushed back to 1H22. We now expect only Singapore, Taiwan and Korea to tighten this year. The Fed’s change in stance doesn’t mean that a US tightening is imminent (the taper is still 12 months away, rate increases will be 2023) but the Fed’s more hawkish stance will tighten liquidity and support a stronger USD in the same way that the USD outperformed ADXY in the years ahead of the first US rate hike in 2015. To end-2022 we see Asian currencies weaker.