Developing Asian economies will revert to a more moderate growth outlook of 7.5% this year and 7.2% next year after posting its fastest growth of 9% in nearly two decades in 2007, the Asian Development Bank (ADB) says in a new major report.

The report projects an inflation rate of 7.8% in 2008 in Asia and the Pacific, up from an earlier estimate of 5.1%. In 2009, inflation could reach 6.0%.

Clouding the outlook for the region, the report notes, are the continued elevated level of international oil and food prices, the persistence of high inflation, and a prolonged slowdown in industrial countries.

The report highlights that a supply shortage will remain a dominant issue in global commodity markets.

"While oil prices are likely to soften somewhat in the short run, they will remain high and volatile in the long run. High oil prices are here to stay. And as food prices are heavily influenced by oil prices, high food prices are here to stay as well," says Ifzal Ali, Chief Economist of the Manila-based multilateral development bank.

The report also warns that the inflation spike now seen throughout developing Asia cannot be blamed solely on cost-push factors, such as high global commodity prices. Analysis in the ADO Update shows that demand-pull factors, in particular excess aggregate demand and inflation expectations, account for a larger share of variations in domestic price inflation.

"The impact of high food and oil prices on inflation has been muted in most of Asia," says Mr. Ali. "This central finding has vast implications for monetary policies in the region. In particular, it means that monetary tightening will continue to be a principal instrument for fighting inflation in Asia. It’s time to tighten our belts and for governments to cut subsidies, on fuel for example, that have shielded consumers from the brunt of the increases. These subsidies are not sustainable. When the subsidies are removed, renewed upward pressure will commence and will raise inflation."

The ADO Update urges developing Asian economies to address rising inflation even at the expense of slower growth, adding that the region must learn to adjust to high commodity prices.

The report also recognizes that the regional outlook remains tied to the fortunes of industrial countries.

"Uncoupling is a myth," says Mr. Ali. "Our study shows that the region still depends on industrial countries to fuel its growth. If the global slowdown extends beyond 2009, the repercussions for the region could be severe."

Overall, the report concludes, the key to fulfilling the region’s enormous potential is the speed and success by which macroeconomic stability is restored and requisite structural reforms are adopted.