Inflation set to rise soon

The CPI for May contracted by 1.27 per cent from a year ago, but expanded slightly, by 0.17 per cent, from April, showing that inflation has been bottoming out and should start climbing back in the following months.

Inflation fell last month on lower domestic oil prices and lower electricity bills. The fuel adjustment charge for the May-August period was trimmed by 9.35 satang per unit.

"The policy-rate cut, which caused the baht to weaken, will also cause higher import [prices] and rising inflation," Somkiat Triratpan, inspector-general and director of the Policies and Trade Strategies Bureau, said yesterday.

The average price of Dubai oil went up from US$57.31 per barrel in April to $63.68 in May, while the baht slid to 33.56 against the greenback from 32.50 in April.

While inflation will soon advance to positive territory, it is projected to retreat by 1.1 per cent this quarter.

The ministry’s projection for 2015 inflation remains at 0.6-1.3 per cent.

In the first five months, headline inflation was minus-0.77 per cent year on year. However, core inflation, which strips out volatile fuel and food prices, forged ahead by 0.94 per cent year on year and 0.05 per cent month on month, showing that Thais are still spending money.

Core inflation ran at 1.27 per cent in the first five months.

Despite the negative numbers, Thailand has not yet fallen into deflation, as core inflation is still on the rise, while consumer prices are still surging, following supply and demand in the market.

Out of the ministry’s inflation basket of 450 items, prices increased for 164 items, including fruits, eggs, chicken and school fees, while 191 remained unchanged and 95, including electricity and rice, decreased from the previous month.

Tim Leelahaphan, economist and assistant vice president of research at Maybank Kim Eng Securities (Thailand), said the fifth negative reading of headline inflation in May was noted, but the spotlight should be put more on its month-on-month expansion. Headline inflation has now picked up for two months from March to May.

"Last year, headline inflation’s base was higher, as this year’s base was lowered from the drop in oil prices, so more attention should be paid on the month-on-month expansion.

"Headline inflation should be able to make a comeback around the end of the year," he said.

The recent softening of the baht means that imported capital goods and oil will be more expensive, while there could be upside risks from the demand side as domestic demand is gaining momentum from the increase of tangibility in government spending on investment.

"Raise import prices and the expected increase in domestic demand will contribute to the rise of inflation towards the end of the year," he said.

Maybank sees the baht reaching 34.5 per dollar next quarter from the latest appreciation of the US currency that was led by better-than-expected manufacturing statistics in April.