Inflation in May: Near 10-year High, Pressuring Household Spending (Business Brief No.2186)

• Headline CPI in May 2008 stood at 7.6 percent, up from 6.2 percent in April – higher than the 6.5 percent expected by most analysts and the highest in almost 10 years. The Core CPI – excluding energy and fresh food prices – edged up to 2.8 percent, higher than the 2.1 percent in April – being also higher than the 2.5 percent earlier expected.
• Over the remainder of this year, KASIKORN RESEACH CENTER (KResearch) forecasts that over the next 3-4 months, Headline CPI may continue to head upward and remain above 8.0 percent. This accelerating inflation can be attributed to the escalating oil prices, higher goods prices and recent wage increases. As a result, the average Headline CPI for 2008 may range in 6.8-8.0 percent (with the mid-case at 7.4 percent) against the 2.3 percent seen in 2007; meanwhile the average Core CPI is projected at a range of 2.7-3.3 percent (mid-case of 3.0 percent) against 1.1 percent last year.
• Rising inflation may put a pressure on domestic private spending. In addition to this, an uncertain domestic political situation may even be a drag on Thai economic growth in the following quarters after recording growth of 6.0 percent in the first quarter. In 2008, the Thai economy may grow some 4.9 percent, almost on a par with 2007, but lower than the upper range of 6.0 percent projected by the Bank of Thailand and the Ministry of Finance.
• Steep oil prices may not only push up inflation, but also affect the country's trade and current account balances. Thailand may be vulnerable to trade deficits and a significant increase in the current account deficit in 2008. These twin deficits are similar to what happened in 2005, which was also caused by the soaring oil prices. It is undeniable that the trade deficit will inevitably pressure the Baht and the Bank of Thailand's monetary policy maneuvering. If the country is confronted with accelerating inflation and a current account deficit, the central bank may be compelled to adopt a tighter interest rate policy to tame inflationary pressure and attract foreign funds to finance the deficit.

In summary, inflation in May that accelerated to a near 10-year high will likely put the average inflation figure for 2008 in a range of 6.8-8.0 percent, against 2.3 percent last year. This soaring inflation will inevitably affect domestic consumer spending and decelerate economic growth in the following quarters. The Headline CPI, meanwhile, is set to rise over the next 3-4 months and Core CPI may continue to rise until this year-end. Under these circumstances, the Bank of Thailand may have less leeway to maneuver their monetary policy, in particular, in light of recently higher interest rates at commercial banks.