Thailand's inflation roller coaster
Deflation next?

By Jon Fernquest

Deflation or no deflation?

This is the big question that economists around the world have been asking.

Inflation has been falling at a steady rate since June in Thailand (See diagram on right).

Will the trend continue?

Looking at the details of inflation

Inflation is measured by two indices. The Consumer Price Index (CPI) measures inflation in the goods that families (households) buy. The Producer Price Index (PPI) measures inflation in goods produced by companies Let's look in more detail at consumer goods in Thailand and how they contribute to inflation.


There are two main types of goods included in the CPI index:


These two basic groups of goods can be broken down into more detail:
 
36.06% - Total Food and beverages

63.94% Total Non-food and beverages



 Another way to break down the goods contributing to inflation looks at food and energy separately:


The core inflation rate is calculated by exlcuding raw food and energy, two groups of goods that have extremely volatile prices that move up and down a lot like they did this year.

What goods are contributing to inflation?

The following table shows how the consumer price index (CPI) for November, 2008 was calculated (Source: Ministry of Commerce):


Each row or line in the table represents a group of goods. The first column represents the percentage contribution of the group of goods to the price index (overall price level of economy). The last two columns show the inflation rate (percentage change) for the month of November and the year-to-date.

Which goods are driving the inflation rate?

Oil prices are one big factor in the recent precipitous drop in inflation, with oil dropping from a peak of $140.63 per barrel in July to $47.61 yesterday.

Global recession is pushing oil prices as well as prices for other commodities down in anticipation of reduced production and demand worldwide. The price of rice and rubber, two commodities that Thailand is the leading world exporter of, have fallen in line with all commodities.


When forecasting inflation, future exchange rates which might change greatly also have to be taken into account. If there are big movements is the US dollar, there will likely be big movements in the Thai baht and this will have an effect on oil prices.


Food and beverages account for a large percentage of consumer prices in the CPI. You can see in the breakdown of CPI into product groupings below, that food and beverage at 15.4% in November is still quite high and contributing a lot to overall inflation.
 
Non-food and beverages was quiet low at -5.9% and with a negative contribution was helping to reduce inflation. You can see that the line "Electricity, fuel, and water supply" for homes at -14.1 with a contribution of 5.1% to the CPI index was also helping to reduce inflation.

The Six Measures in Six Month programme of former Prime Minister Samak might have something to do with this. According to today's Bangkok Post: "The [Commerce] ministry also believes that the expiry of the government's measures to lessen living costs through subsidised utility bills and transport fares to the public in January would bring inflation up by 1% next year."

Down at the bottom under "raw food and energy" you can also see that for November raw food contributed 20.3% and energy contributed -22.9% which clearly shows that food inflation is pushing the overall inflation rate up while energy prices are pushing it down.

Does this mean we should forget about oil prices and alternative energy sources? No. One day the inflation roller coaster will start going up again.

The only way to make progress on energy is to persist with policies directed at energy, not wait for another crisis at which time once again it will be too late.

Also check out a long-term graph of inflation from Thailand Crisis blog.


(Source: Bangkok Post, business, 02-11-08, Inflation slows to 2.2% in November, POST REPORTERS, link)

Posted by Jon Fernquest at 01:28 PM | Permalink | Comments (0)