Headline Inflation for February 2010 rose 3.7 percent YoY, against the 4.1 percent seen in January, the highest level in 16 months. Although the prices of fresh food – including meat, vegetables and fruit – had risen MoM with the Chinese New Year, inflation dropped due to a high base effect from last year when the government canceled the oil excise tax cut.
It is noteworthy that the Core Consumer Price Index, excluding food and fuel, remained unchanged MoM, reflecting that consumer spending had not improved much. Thus, sellers were unable to increase the prices despite the higher costs. Meanwhile, Core Inflation rose 0.3 percent YoY, decelerating from 0.5-percent in the preceding month. This figure was also below the BOT's inflation targeting framework (after reaching the lower limit for only one month).
As for the outlook, KResearch expects that lower Headline Inflation may be only a short-term phenomenon. Nevertheless, commodity prices will likely rise more and the severe domestic drought may increase farm produce prices, thus driving Headline Inflation higher in 2H10. KResearch views that Core Inflation is also beginning to move upward. Although inflation is expected to reach perhaps only 1.5 percent in 1H10, it should accelerate in 2H10 and approach the BOT's upper limit in their targeting framework (0.5-3.0 percent) in 4Q10.
KResearch, therefore, maintains inflation forecast for 2010, because the government's cost-of-living relief measures will last until June, helping to partially reduce inflationary pressure. It is expected that Headline Inflation will increase to 3.0-4.0 percent. Meanwhile, Core Inflation may increase to 1.5-2.5 percent, against the contraction in Headline Inflation of (-)0.9 percent and Core Inflation at 0.3 percent in 2009.
Higher inflationary pressure will affect the government's economic policy significantly in many dimensions, including the BOT's monetary policy and the government's decision as to whether they should continue subsidies on product prices and utility charges. If the economic recovery continues, the government intention to scale down economic stimuli and other special subsidy programs will be unlikely to affect economic growth. On the other hand, if any risks interrupt the continuity of the recovery, careful thought must be given to any decision on an economic relief exit strategy.
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