Rapidly rising inflation remains a "major risk" in Asia and could trigger a potentially damaging wage-price spiral, the Asian Development Bank warned Thursday.
The Manila-based lender said strong domestic demand and surging commodity prices had pushed inflation above 10-year averages in some East Asian countries and was being exacerbated by speculative money flowing into the region.
Higher interest rates and tighter restrictions on bank lending as well as faster appreciation in exchange rates could help policymakers rein in prices, the ADB said, in an apparent reference to China, which controls its currency.
"Higher-than-expected inflation could lead to wage-price spirals, threatening macroeconomic stability and constraining policy options," the ADB said in its latest Asia Economic Monitor report, released in Beijing.
A wage-price spiral is when rising prices leads to workers demanding higher wages, which drives up production costs and puts further upward pressure on prices.
"The risk is there but policymakers know that this risk is right in front of their eyes" and are taking steps to address inflation, Iwan Azis, head of ADB's Office of Regional Economic Integration told a news conference.
Inflation around the region was hovering at 3-6 percent but in some places, such as Vietnam, it had hit 20 percent by the end of June, the lender said.
China, the world's second-largest economy and a key driver of regional and global growth, saw inflation reach a three-year high of 6.4 percent in June despite persistent government efforts to bring prices under control.
The ADB forecast that East Asia -- which includes China, South Korea, Taiwan, Singapore, Vietnam, Malaysia, Thailand, Indonesia, Philippines, Cambodia and Laos -- would grow 7.9 percent this year.
The predicted growth is higher than its previous forecast, made in December, for 7.3 percent, but slower than the 9.3 percent reached in 2010 -- a trend that is likely to continue as countries battle rising prices, said Azis.
Azis warned the deepening eurozone debt crisis, sluggish growth in the United States and the downturn in Japan triggered by the March earthquake and tsunami could hurt demand for the export-driven region's overseas shipments.
But policymakers should be careful not to "over-react to the slowdown in advanced economies as regional growth remains resilient and inflation a continuing problem", the ADB said.
Another risk to the outlook for East Asia was the possibility of the US defaulting on its debt, which could have a devastating effect on global markets and the world economy.
Such an event would weigh heavily on the US dollar and likely drive up the value of Asian currencies, making exports from these countries more expensive and fuelling inflationary pressures.