Upward Inflation Increasing Pressure for Monetary Tightening by BOT (Business Brief No.3151)

Based on the latest data for July 2011, consumer goods prices continued to increase. Headline Inflation for July 2011 was at 4.08 percent YoY, rising over the June figure of 4.06 percent. Meanwhile, Core Inflation increased to 2.59 percent YoY in July, against the June figure of 2.55 percent. Although the latest inflation figures did not reflect an accelerating pace as seen during previous months, KResearch forecasts that it will likely escalate further and may reach its peak at the year-end, or early 2012, depending on the conclusion of minimum wage increase proposed by the new government. Regarding the 2H11 inflation outlook, KResearch estimates that the average Headline Inflation rate will increase over what was seen in 1H11. The Headline Inflation may stay at 4.5 percent YoY on average in 2H11, rising over the 1H11 figure of 3.56 percent, while the average Core Inflation rate in 2H11 may rise to at least 2.8 percent, accelerating over the 1H11 figure of 1.91 percent. It is possible that Core Inflation in some months will exceed 3.0 percent, which is the upper limit of the BOT inflation-targeting framework of 0.5 to 3.0 percent. Key factors that likely affect Headline Inflation estimate is the expiration of measure to forestall diesel price at below THB30 per liter that will happen in tandem with salary increases for civil servants (with bachelor’s degree). Meanwhile, other significant factors include global oil prices, climate changes affecting farm produce prices, mechanism to pass on rising manufacturing costs (higher energy prices, increasing wages, rising raw material prices and surges in interest rates) to consumer goods prices as well as greater clarity on “inflation expectation” trend after the announcement of economic policy by the new government. At the next MPC meeting to be held in August, KGroup expects that the Thai policy rate will be raised by 0.25 percent to 3.50 percent, and may be increased further during later meetings over the remainder of this year as inflation risk is regarded as an important variable determining BOT monetary stance.