Headline Inflation in May 2010 rose to 3.5 percent YoY, from 3.0 percent in April. It had also increased 0.2 percent MoM. Despite sharp declines in domestic oil prices in May from April, fresh food prices rose. Meanwhile, Core Inflation in May accelerated to 1.2 percent YoY, from 0.5 percent in April. The increase stemmed in part from the low base of May 2009 due to the implementation of the government's 15-year free educational program that resulted in a large reduction in education-related consumer expenses.
Last month global oil prices saw a plunge in the wake of anxiety seen in global financial markets over the debt crises in Greece, Portugal and Spain. Local retail oil prices have declined in tandem. Even though falling oil prices will ease inflationary pressure somewhat over the coming months, we maintain our view that there will be a rising trend in 2H10 inflation. KASIKORN RESEARCH CENTER (KResearch) forecasts that 2Q10 Headline Inflation may decelerate to around 3.3 percent, from 3.8 percent in 1Q10. Nonetheless, inflation may rise during 2H10 if the global turnaround remains on track, which would push oil and commodity prices higher globally.
We have thus maintained our projection on Thailand's 2010 Headline Inflation at 3.0-4.0 percent. However, we have cut our Core Inflation projection to 1.0-1.5 percent, from the 1.5-2.0 percent projected earlier. The downward revision was due to weaker oil prices and an economic slowdown due to recent political violence that may moderate increases in consumer product prices over the remainder of the year.
KResearch holds the view that the decelerating Core Inflation may alleviate pressure on the Bank of Thailand (BOT)'s early decision toward any monetary policy change. In other words, the BOT may have some leeway in maintaining an accommodative monetary policy by keeping the policy rate unchanged at 1.25 percent for the foreseeable future. Keeping the status quo would be consistent with the government's policy priorities which focus on sustaining the economic recovery, since many businesses were affected by the recent political unrest. However, a possible acceleration in Core Inflation during 2H10 may eventually prompt the BOT to resume their tightening stance, especially after the impacts of the recent political turmoil on the economy ease.
Looking ahead, the inflation trend may depend on the global economic rebound that would influence global commodity prices, especially oil and farm produce prices at home. Attention should also be paid to the government's policy on relief measures for low-income earners and price controls that are due to expire at the end of June.
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