Curbing inflation must be the govt's top priority

The Commerce Ministry yesterday announced that the inflation rate last month rose by 7.6 per cent year-on-year, the highest it's been in 10 years and five months. The announcement should serve as a wakeup call for the Samak government on the need for it to act quickly and effectively to curb inflation.

The increase was expected after inflation in April rose by 6.2 per cent. The announcement of inflation in May could be troublesome, as if people believe inflation will worsen, there is a risk that those expectations could become self-fulfilling.

The prospects are not positive.

The external trade deficit of US$1.77 billion (Bt57.6 billion) in April, which has led to an abrupt deterioration of the current account position - now registering a hefty deficit of $1.66 billion during the month-could tilt the balance of risk further to inflation. A worsening current account position would weaken the baht against the US dollar.

So far, the government has either been too slow or done too little to deal with inflation. The Samak government has left the Bank of Thailand and the Commerce Ministry to deal with rising prices. The Commerce Ministry has been trying to desperately freeze the prices of certain consumer products. But the measures seem to be desperate despite Commerce Minister Mingkwan Sangsuwan's good intentions because measures to look after consumers who are adversely affected by rising prices require the full cooperation of all ministries.

The Bank of Thailand has certain limitations when it comes to using the monetary policy to curb rising prices. However, if the interest rate were raised to a level that is too high, it would negatively affect business and consumer confidence. Escalating inflation and interest rates mean higher costs for corporations and consumers and worsen the quality of bank's assets. Interest-rate hikes would temper the ability of debtors to service their loan repayments.

Higher inflation and higher prices could also delay investment and consumption, which in turn could disrupt the momentum for economic growth.

The Finance Ministry has been trying to boost consumers' spirits and spending through a variety of tax rebates and an economic-stimulus package.

The government needs to find a delicate balance to curb inflation and boost economic growth.

However, yesterday's inflation announcement is likely to test the core inflation target of 0 to 3.5 per cent. The higher rate in May is likely to prompt the Bank of Thailand to accelerate policy tightening during its next scheduled meeting on July 16.

But the rate hike is unlikely to do much to curb inflation, largely because of the country's dependence on foreign supplies, especially imported fuel. Therefore, the Samak government would have to implement decisive and effective measures to cushion the impact on the public from rising prices.

First of all, the government should focus on the demographic groups, which would be hardest hit by rising prices such as low-income earners, whose food costs account for a large chunk in their incomes. For instance, the Labour Ministry may seek cooperation from the corporate sector to provide temporary allowances for their employees. Students should be able to commute to school at a low cost despite the rising price of oil.

A nationwide campaign to save energy should be implemented to lessen the country's dependence on imported fuel, which is the main source triggering price increases at home.

In fact, several economists have earlier recommended the government to focus on specific sectors but no comprehensive measure has been revealed so far.

If the public becomes downbeat concerning future prospects, social expectations could result in further price increases.

Instead of wasting time bickering about the domestic political situation at home, the Samak government should now put its energy into thinking of measures to deal with inflation and the consequences that rising prices have for society.