Rising prices have hurt East Asia's growth, says report

Rising food and fuel costs have become a hot political issue in many Asian economies

Rising consumer prices have hurt growth in emerging East Asian economies, the Asian Development Bank (ADB) has said.

Annual growth in the region's ten largest economies moderated to 8.1%, in the first quarter of 2011, down from 8.4% in the previous three months.

Consumer prices in the region have been rising due to higher food and fuel costs.

East Asia is home to some the world's fastest-growing economies, including China.

"Inflation in many economies has risen above 10-year averages, either breaching or remaining near the upper end of central bank targets," the ADB said.

As the region's economies continue to expand, domestic demand has been growing.

While that has been good for growth, it also has created issues for the governments by putting pressure on inflation rates.

Warning

To make matters worse for the economies, higher commodity prices have driven up the cost of essential goods across the region.

The bank warned that if price growth does not slow, it could make things more difficult for the region's economies.

"Elevated food and commodity prices and robust domestic demand could push inflation higher yet," the bank said.

Rising prices have seen many economies in the region raise interest rates in a bid to curb price growth.

Tighter monetary policies have resulted in a slowdown in growth.

Earlier this month, China said its economy grew by 9.5% in the three months to the end of June compared with a year earlier, down from 9.7% in the previous quarter.

However, the bank said the economies will continue to take measures to tackle inflation.

"Authorities are expected to keep tightening monetary policy and rolling back fiscal stimulus to counter rising inflation and economic overheating," the bank said.

Policy dilemma

While higher interest rates have been used as an effective tool by the central banks in the region to fight higher prices, they have also created a dilemma, not least because of the robust expansion.

While economies in the region have been witnessing rapid growth, developed countries such as the US and in Europe are going through tough times.

The central banks in these economies have cut interest rates to historic lows in an attempt to boost growth.

The bank said this "two-paced" global economy had resulted in investors flocking to the region's economies looking for better returns, putting further pressure on inflation.

"Continued short-term capital inflows add to already ample liquidity and exacerbate price pressures," it said.

The bank said that not only is the inflow of funds creating problems with consumer prices, it poses a serious threat to the overall economic growth.

"Large capital flows could also destabilize the real economy," it said.

Investors have been wary of entering the developed markets in recent times, given the uncertainty surrounding the debt issues in various countries.

However, the bank warned that as the situation in those economies improves, investors may pull out of the region, thus hurting growth.

"Changes in risk sentiment could bring sudden capital flow reversals, damaging the region's growth prospects," it warned.