The projections made by a score of public and private sector entities, as well as KResearch, all show that inflation will trend higher in 2011.To help ease the high cost of living on consumers and exorbitant energy prices on businesses, the government has mapped out a number of assistant guidelines for immediate relief.
KResearch expects that if the current relief measures are extended, they may help ease pressure on Headline Inflation in 2011 by about 1 percent; otherwise it could surge to 4.3 percent, compared to 3.3 percent in 2010.
Regarding the recent Cabinet approval of minimum wage increases, KResearch expects that this will probably drive up production costs by about 0.65 percent, but its effect on inflation in 1Q11 may not be so apparent because of a base effect that could cause Headline Inflation to reach 2.9 percent in 1Q11, though still close to the 4Q10 level. Meanwhile, the government will face a daunting task in capping retail prices on diesel fuel at not exceeding THB30/liter, because mechanisms of the government's Oil Fund may not be adequate to support such fuel subsidy over the long-term if global crude oil prices surge above USD90/barrel next year. Thus, any effort to stabilize diesel prices at that level will be difficult.
KResearch has assessed that Headline Inflation in 2011 will be within a range of 2.5-4.0 percent (most likely at 3.3 percent) and Core Inflation in 2011 will be within 1.8-3.0 percent (most likely at 2.3 percent), which should coincide with the effects of the government's cost of living relief programs, minimum wage hikes and fuel subsidies. KResearch believes that relief measures will be able to ease inflationary pressure somewhat amid an upward inflationary trend that will likely prompt the Bank of Thailand to tighten their key policy rate during 1H11 to maintain price stability. KGroup expects that Thailand's policy rate may edge up to 2.5 percent by mid-2011, versus the 2.0 percent now.
However, it will be necessary to keep track of the government's future policy direction. Although the government is able to solve immediate problems related to the high of cost of living and lofty fuel prices (for diesel fuel and natural gas), their reform efforts toward mitigating social disparities and overhauling the structure of fuel prices will likely encounter a number of challenges in the medium-term and beyond, because the above impediments will require definitive policy solutions and may affect fiscal stability in the future.
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