The specter of inflation is haunting Asia. Just ask Singapore, normally viewed as the least inflation-prone country in the region. Despite a strong currency, deflationary fiscal policies and the absence of independent trade unions to push up wages, Singapore is now seeing its highest inflation rate since the mid-1990s. The other city state, Hong Kong, is probably about to see a similar jump. With these two open but conservatively managed economies inflating fast, the outlook for almost everywhere in Asia other than Japan and Taiwan is for equally sharp increases from much higher historical levels.

In August the year-on-year increase in Singapore’s Consumer Price Index (CPI) hit 2.9 percent and is widely expected to hit 3 percent when the September numbers are released. Part of the problem arose from the increase this year in the goods and services tax, a rise intended to transfer some of the tax burden from income to consumption taxes but did not reflect an fiscal need given that the government’s surplus is high and rising.

However, the big jump in the CPI cannot just be blamed on government actions. Food prices in Singapore, as everywhere else, have been rising fast as have energy and transport costs and even prices of goods such as clothing, which have long been flat or falling, have picked up. All this is despite a modest rise in the value of the Singapore dollar against the US currency.

However, the Singapore authorities are reluctant to see a faster currency rise for fear of its effects on competitiveness. Indeed it has fallen against the euro and Australian dollar and also the won and the baht. Interest rates have stayed relatively low, as everywhere, and the yield on 10-year government bonds – 2.75 percent is now below the inflation rate while money supply is growing at 20 percent. All this extra liquidity and low yields on bonds and bank deposits have been good for the stock market but suggest that Singapore’s inflation could become ingrained if the authorities are not prepared to raise rates and accept a further rise in the currency. As it is, the Singapore dollar, which was very weak at mid-year has appreciated by almost 2 percent against the US dollar in the past six weeks and also recovered against the Malaysian ringgit to the same level as a year ago.

Meanwhile in Hong Kong rather different headline data hide a similar story. The year-on-year increase in the CPI is currently only 1.5 percent. This number would be about a percentage point higher but for temporary property tax relief granted by the government in its last budget. The impact of rising rents is also poorly reflected in the headline figure as the method of calculation means that it lags well behind the event, and does not properly reflect increases in asset prices. Third, the impact of sharp rises in food and other prices in China and the 15 percent appreciation of the yuan against the HK dollar since 2005 have yet to be fully passed through to Hong Kong.

Interest rates meanwhile have remained low, in keeping not only with the peg to the US dollar but reflecting the level of liquidity in China and the lingering expectation that the local currency would eventually be re-pegged. Money supply has risen 18 percent over the past 12 months but local lending at only half that rate.

Ultimately inflation is always a monetary phenomenon so it is hardly surprising that it is now catching up with years of easy money and low interest rates in Asia as well as the rest of the world. Inflation problems for Asia’s relatively strong economies are now being further fuelled by the reaction of the US Federal Reserve, and to a lesser extent by the European Central Bank and the Bank of England, to financial sector problems.

The latest shower of cheap money, intended to compensate for poor lending practices, imposes huge problems on Asia. Should interest rates and currencies rise sharply, or should they accept the inevitability of a new bout of high inflation? If Singapore has a problem, just imagine what others will have.