Oil's Slide Is Good For Asia, But Comes With Catch

A selloff in commodities is good news in Asia, where inflation has become a major worry -- but not as good as one might think.

Tackling inflation has become a top priority for policy makers from Beijing to New Delhi, who have reacted by steadily tightening credit and letting their currencies appreciate against the dollar. Central banks in both the Philippines and Malaysia raised key interest rates 0.25 percentage point on Thursday. Two days earlier, India surprised markets with a half-point rate rise after inflation jumped to nearly 9% in March.

Commodities are a big part of the problem. louis vuitton wallet for women Announcing its rate increase, Malaysia's central bank cited expectations that commodity and energy prices would remain high all year. In the Philippines, average oil prices reaching $140 a barrel would push inflation to 5%, up from 4.4% with oil at around $100 a barrel, Barclays Capital notes in a report, citing central-bank estimates.

So central bankers should be sighing with relief as oil continues to push lower following its 8.6% plunge in the U.S. to just below $100 a barrel on Thursday. On Friday, the front-month June contract fell another 2.6% to $97.18. The week's 14.7% plunge was the steepest one-week drop since December 2008.

The catch is that declining oil prices reflect vulnerability in the broader economic outlook, which isn't good for Asian exporters. Some of the drop in commodities no doubt comes from investors unwinding positions after a sharp runup in prices. But concerns about the strength of the U.S. recovery linger, despite Friday's positive jobs report, as do worries about sovereign risk in Europe.

Recent purchasing-manager index levels in Asia are another cause for apprehension. They show that manufacturing is still expanding, but inventories are growing, too. Expect exports to feel the impact in coming months -- not great news for a region that still depends on overseas consumers to buy its output.

Even if commodity prices stay lower, which is hardly a given, inflation won't be licked entirely, and rates will still need to climb. Bank of America Merrill Lynch is still predicting rate hikes in India, Malaysia and Thailand later this year, as well as further tightening in China.

The pressure isn't just from commodities. The purchasing power of workers in China receiving newly bumped-up wages is pushing up prices of goods there. Across the region, the price of real estate and other assets has risen from an inflow of global capital seeking to benefit from currency appreciation.

'I wouldn't take down the red flag in Asia,' says Frederic Neumann, co-head of Asia economics at HSBC, who says interest rates and currency-exchange rates across the region are too low for healthy economic development.

Cheaper gas, copper and soybeans might provide welcome ammunition in Asia's battle against inflation, but they don't won't win the war.