The CPI data for September 2010 pointed to benign inflation in Thailand over the short-term. Despite increases in food prices during the month, decreases in non-food items moderated the September Headline CPI month-on-month (MoM) for the first time this year. The September Headline CPI dropped 0.07 percent MoM, and rose only 3.0 percent YoY, down from the increase of 3.3 percent recorded in August. This may reflect that manufacturers remain reluctant to raise product prices amid anticipation of softening consumption. Meanwhile, Core Inflation for September remained stable MoM, but declined to 1.1 percent YoY, compared to 1.2 percent YoY in August.
The milder than expected path of inflation, plus Baht appreciation and softening economic momentum in Thailand and elsewhere have prompted KResearch to revise downward our projection for 2010 Headline Inflation to 3.3-3.5 percent YoY, from the 3.2-3.7 percent we forecast earlier. We have also cut our projection for Core Inflation to a range of 0.8-1.0 percent, down from the 1.0-1.4 percent estimated previously.
This tamer headline Inflation and stable core Inflation seen over the past three months may indicate that our consumption levels have not yet achieved a full recovery, which may induce manufacturers to keep product prices unchanged. This trend has been echoed in decelerating growth in domestic spending, which may indicate easing concern toward inflationary pressure over the short-term. Even so, KResearch still projects that 2011 core inflation will continue to rise and may peak in 3Q11. We therefore view that current upward inflationary pressure may imply that the Bank of Thailand's policy rate normalization efforts may continue after the two hikes in the key policy rate, now at 1.75 percent, instituted at the last two MPC meetings.
From the end of this year through to early next year, the inflation trend may hinge largely upon global commodity prices, wage hikes at the beginning of next year, and the government's subsidy programs including assistance measures for low-income earners, the freezing of LPG and NGV prices, as well as diesel fuel subsidization – some of which are expected to be extended further.
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