Today (March 2) the Ministry of Commerce announced inflation data for February 2009. The significant points include the following:
Headline Inflation in February 2009 dropped 0.1 percent YoY, which was the second consecutive month of contraction after falling 0.4 percent YoY in January. The major reason was the high base effect Month-on-Month (MoM) of last year. However, the Headline Consumer Price Index increased 1.0 percent against January MoM, which was mostly due to the end of the ;6-Point, 6-Month” economic relief package on February 1, 2009, wherein the fuel excise tax cut was terminated, but a reinstalled version of that stimulus has boosted consumer expenditure. Core Inflation in February was 1.8 percent YoY, increasing from 1.6 percent last month, due to the adjusted water and electricity subsidies to the public.
KASIKORN RESEARCH CENTER (KResearch) expects that Headline Inflation will likely continue to fall YoY until July due to the base effect of last year. However, it is possible that inflation in March may contract less or turn positive, which would be largely influenced by the oil price direction in the global market. The Core Inflation trend is expected to slow in coming months with a chance that it may contract again somewhat, mid-year.
In 2H09, there will be two factors that should be watched; one is oil prices in the global market and the other will be progress on economic recovery in China. The Organization of Petroleum Exporting Countries (OPEC) recently signaled more cutbacks in output starting in April. Also, low reserve inventories will have an impact on the situation. Meanwhile, it is expected that Chinese economic stimuli will gradually begin to bear fruits. Those two factors might increase the prices of commodities. However, commodity prices – particularly oil – will not surge much because many economies remain in recession.
KResearch expects that Headline Inflation in 1H09 will shrink by 1.0–1.8 percent and will remain low until 3Q09. As a result, this will affect the 2009 whole-year inflation rate, likely coming to around -1.0 to +1.0 percent, dropping from 5.5 percent in 2008. On the part of Core Inflation, it is expected to be around 0.0-1.0 percent, dropping from 2.4 percent in 2008.
KResearch views that low inflation will support the government toward further expansionary monetary policy. It is obvious that the current economy is signaling a deepening and prolonged global recession, because the 4Q08 GDP dropped more than expected and January 2009 economic indicators reflected decreasing demand in the private sector, including consumption, investment and exports. The problem of higher unemployment, extremely tight business liquidity and lower turnover will affect credit quality. Also, a global economic recovery could prolong the problems of the manufacturing sector and unemployment. As a result, the authorities will have to formulate additional economic stimuli, such as monetary and financial measures to boost the domestic economy and lessen the negative impacts on people and businesses now waiting for signs of a global economic recovery.
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