June inflation data released recently by the Ministry of Commerce showed that Headline Inflation contracted 4.0 percent YoY, a steeper fall than the 3.3 percent drop in May. That figure represents the sixth consecutive month of contraction. The Headline Consumer Price Index in June rose 0.4 percent MoM because the average domestic fuel price in June increased 7.9 percent MoM.
Core Inflation in June that fell 1.0 percent YoY, representing a continued contraction from May. This figure deviated from the BOT's inflation targeting framework of 0.0-3.5 percent, and remained so for the second consecutive month. In addition, it was found that Headline and Core Inflation in June recorded the deepest contractions in almost 18 years (since compilation of monthly data began). In 1H09, Headline Inflation dropped 1.6 percent, but Core Inflation rose 0.7 percent YoY.
In 2H09, KASIKORN RESEARCH CENTER (KResearch) expects that there may be factors that could help spur product prices, including crude oil and commodity prices that are trending higher and may continue so if the global economy recovers steadily (which might result in higher inflation). Nonetheless, rising inflation would likely be affected by the government's economic stimuli, such as whether they will extend their ;Five Measures, Six Months” economic relief program, which is due to expire at the end of July, as living expenses would increase when that happens. New oil excise tax rates, which have not been concluded yet, will be another factor affecting inflation.
However, such factors as inflation in 1H09 that was lower than previously expected, along with anticipated weaker consumer spending in 2H09 caused by rising unemployment and the H1N1 flu pandemic, will likely induce the people to avoid crowded places, thus inhibiting business proprietors from increasing product prices, though they are shouldering higher costs. As a result, slowing inflation might continue longer than expected. The Headline Inflation will likely turn positive at the end of 3Q09 or early in 4Q09, rather than in mid-3Q09, as thought before.
Therefore, KResearch is reducing our Headline Inflation projection for 2009 to a range of -0.5 percent to +0.5 percent, against the 0.0-1.0 percent thought before, a stark contrast to the 5.5 percent increase of 2008. The inflation rate in 2H09 might thus turn positive during the latter half, against the contraction of 1.6 percent in 1H09. Meanwhile, Core Inflation might inch lower to 0.4-0.9 percent, against the former projection of 0.5-1.0 percent, dropping from the 2.4 percent Core Inflation rate of 2008.
KResearch views that although the contraction in Headline Inflation might remain with us longer than expected and Core Inflation will likely continue to deviate from the BOT's inflation targeting framework of 0.0-3.5 percent. Then, the inflation rate would gradually rise and force Core Inflation into a range of more than 3.5 percent by the end of the year. As a result, the probability that BOT will reduce their policy rate soon is low. Nevertheless, low inflation rates might help BOT continue with their low interest rate policy over the remainder of 2009 in order to spur domestic spending and support private sector's business operations.
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