February 28th, 2011
02:59 AM GMT
Hong Kong, China (CNN) - The Mideast turmoil has oil prices hovering near $100 a barrel again. For Asian economies, an extended period of high oil prices could have a number of knock-on effects, including hurting oil-dependent industries like autos and construction, and depressing exports to the U.S. and Europe.
The real danger though may lie in single word: inflation.
Economies from China to Vietnam to India are already struggling to contain rising consumer prices, especially for staple foods like corn and onions. These costs hit many of society's poorest families, as they struggle to meet basic food and energy costs. They are also taxing government balance sheets, with food and energy subsidies still common place in this part of the world.
In a research note HSBC described the combination of high food prices, gaining core prices, labor tightness and the oil shock "a lethal brew."
HSBC Economists Frederic Neumann and Sherman Chan warn, "Crude, in fact, is especially tricky: though energy prices do not constitute an overwhelming share of local CPI baskets (food dominates), it can have a pernicious effect on inflation and price expectations."
Part of that unpredictability comes from the intertwined nature of food and oil prices. Higher energy prices also mean higher costs for fertilizer, transport and, this is key, manufacturing. UBS economists have gone as far as to say that "food isn't food," with only 20% of consumer food spending in OECD countries going to the actually agricultural commodities. The rest is labor, energy, transport, and so forth. Measures of food inflation don't just track raw ingredients like wheat or corn, they track processed foods, says UBS Managing Director Peter Hickson.
"When you look at what drives processed food [prices]," says Hickson. "It comes down to labor and it comes down to energy costs."
It's nearly impossible to guess whether the current spike in oil prices is here to stay, with markets fixated on unpredicted political developments in the Middle East. A return to $85 dollars a barrel could be on the horizon.
But if it's not, Asian economies might just get hit where they are already hurting.
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