The inflation rate released recently by the Ministry of Commerce showed that Headline Inflation decreased 3.3 percent (YoY) in May 2009, contracting more than the 0.9 percent drop in April. Negative values YoY have appeared for five consecutive months. The Headline Consumer Price Index fell to 0.3 percent MoM after having increased to 1.0 percent in April. This is primarily due to the 15-year-free education program that has eased consumer expenses on education and student uniforms. However, the prices of some goods increased MoM; this included livestock products, motor fuels, cigarettes and alcoholic beverages due to excise tax hikes.
Core Inflation fell to 0.3 percent YoY in May, contracting for the first time in more than 5 years since January in 2004. It start to diviate from the BOT's inflation targeting framework of 0.0-3.5 percent. During the first 5 months of 2009, the average Headline Inflation drop and Core Inflation increased 1.1 percent.
Although inflation that has fallen more than projected, KASIKORN RESEARCH CENTER to views that it will not cause much change to the BOT's monetary policy strategy, at present, because it was the result of the government's economic stimuli that sought to reduce cost of living burdens, not a direct result of worsening economic conditions that had forced entrepreneurs to lower prices. Core Inflation deviated from the BOT inflation targeting range, as expected, but inflation may rise later due to expected increases of oil and commodity prices, and the retail price of domestic fuel that will increase because the Cabinet has agreed to increase excise taxes assessments on them in May and Oil Fund subsidies will end in a few months.
Although Headline Inflation will likely contract significantly, and Core Inflation will contract continuously (deviating from the BOT's inflation targeting), KASIKORN RESEARCH CENTER (KResearch) views that this situation will only be temporary. It is likely that the pressure on inflation will increase, particularly in 4Q09. Nonetheless, the extent of that pressure over the remainder of 2009 will be quite acceptable, helping to facilitate the government's easing monetary policy over the next six to nine months. All in all, KResearch projects that Headline Inflation in 2009 will be 0.0-0.1 percent overall, and Core Inflation will be 0.5-1.0 percent, dropping from 5.5 and 2.4 percent in 2008, respectively.
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