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Published on March 18, 2008

Consumers are likely to face an increasing loss of purchasing power and moderate rates of consumption may continue because of the rising costs of goods and services, according to economists.

Research houses have revised upwards their inflation projections and have expressed concern over adverse impacts on the recovery of domestic demand. Their concern follows rapid growth in oil and commodity prices.

SCB Securities has revised its forecast for headline inflation this year to 4.2 per cent, up from 3.5 per cent, as raw food and energy inflation are expected to continue, with growth of 9.1 and 11.3 per cent, respectively. It believes the Dubai oil price will average US$90 (Bt2,800) per barrel.

SCB Securities chief economist Sethaput Suthiwart-narueput said headline inflation had begun to feed into core inflation, and he expected his firm's core inflation projection to be around 1.8 per cent, up from last year's 1.1 per cent because of rapid growth in money supply.

"Oil prices are poised to remain high despite the ongoing economic slowdown, as structural supply constraints are likely to continue to overcome cyclical weaknesses in demand," the company said in a research paper.

The new headline inflation forecast is higher than the 2.8 to 4 per cent projected by the Bank of Thailand. The Commerce Ministry expects the headline rate to be 3.5 per cent, but will revise the figure in the second half.

The high inflation will dampen real wages to expand by only 1.8 per cent, resulting in a moderate 3.7-per-cent growth in private consumption, Sethaput said. SCB Securities believes energy inflation will peak in the first quarter and gradually drop off during the second half of the year, especially in the last quarter, because of the base effect. It will be partly offset by the appreciating baht, which is expected to strengthen by 9.8 per cent this year.

Sethaput said raw food prices would continue to rise because of higher prices for meat and stock feed. The government's price controls on 60 consumer goods will help to hold inflation down for only a few months.

Many manufacturers have been persuaded to cooperate with price controls for a limited time, such as two to six months, while the Energy Ministry has agreed to reduce contributions to the Oil Fund from the retail price of diesel until the end of July.

Phatra Securities has revised its 2008 headline inflation forecast from 3.5 per cent to 4.2 per cent, and core inflation from 2 per cent to between 2.2 and 2.5 per cent. Phatra's senior economist Thanomsri Fongarunrung said surging global prices for agricultural products as well as crude oil prices were to blame for the increasing inflationary pressures. Oil prices are expected to average between $87 and $90 per barrel this year, while headline inflation is expected to peak in the first quarter.

"The upside risk of inflation will create a tough decision for the Monetary Policy Committee [when it comes] to slashing its policy interest rate," Thanomsri said.

She said high inflation would erode the recovery of private consumption.

"We have to see whether private consumption can pick up largely and whether the government's investments will offset private consumption," she said, adding that Phatra maintained its projection for Thailand's economic growth this year at 4.7 per cent.

DBS Securities has revised its headline inflation forecast from 2.6 per cent to 4 per cent, under the assumption that oil prices will average $85 a barrel.

Anoma Srisukkasem

The Nation