Cheap oil to further cut inflation target for 2015

 

“Whole-year inflation could be lower than previously anticipated, as key factors including oil price have been much lower than expected. However, inflation should slightly increase in the final quarter due to the high base year on year last year, while the global oil price will increase following high demand in the market,” Somkiat Trairatpan, inspector-general at the ministry and director of its Policies and Trade Strategies Bureau, said yesterday.

The ministry reported that the Consumer Price Index (CPI) continued weakening in July by 1.05 per cent year on year. Month-on-month inflation was down by 0.07 per cent, the first contraction in six months due to lower oil price. The CPI for the first seven months was 0.85 per cent lower than in the same period last year.

Last month, core inflation – excluding volatile fuel and food prices – remained at 0.94 per cent year on year but increased 0.10 per cent month on month. Core inflation in the first seven months was 1.18 per cent year on year.

Although inflation had gone into reverse for six months, the ministry denied that Thailand had slipped into a deflationary phase. However, the ministry admitted that consumer purchasing power had been declining due to weak confidence in the economy. Major negative inflation was due mainly to plummeting oil prices and lower food price.

The ministry has projected that inflation in the third quarter would decline by 0.3-0.5 per cent, and bounce back to positive growth in the fourth quarter.

BofA Merrill Lynch shared the same view as the Commerce Ministry, saying in its Global Research Report issued yesterday that it expects Thai inflation to gradually pick up as the impact of falling oil prices on inflation is receding. 

“If there is no further fall in global oil price, we expect inflation to go to positive territory by October.”

Similarly, Tim Leelahaphan, an economist at Maybank Kim Eng Securities (Thailand), commented that headline inflation continued showing a negative reading in July, declining but at a slower pace since June. 

“Today’s year-on-year figure seems to show that it has bottomed,” he said.

“In our view, inflation is what we have started calling recently. In addition to waning strong base effects and rising production costs and fuel import prices from the weakening baht, supply-side events from the drought will, to some extent, act in opposition to the supply-side negative inflation on oil. However, there is still need for demand-side factors for there to be significant inflation

Previously, the ministry had predicted annualised inflation ranging between 0.6-1.3 per cent, based on an assumption of average Dubai oil price at US$50-$60 per barrel, while average oil price has continued to decline to $56.49 per barrel, and the average exchange rate of the baht to the US dollar is Bt32-Bt34, in July the baht was quoted at Bt34.27 to the greenback.

Thus, Somkiat said that inflation for this year would be much lower than the previous projection, due to continuous decline of the oil price.

Out of the ministry’s inflation basket of 450 items, prices increased for 165 items including seafood, ready-to-eat food, while 201 remained unchanged and 84 items including dairy products, limes, consumer goods, and fuel decreased from the previous month.