Staring at deflation — or not
Despite the spectre stalking the economy in recent months, economists remain adamant that the threat is a long way off, with Thailand recording negative inflation for myriad reasons. By Pawee Sirimai and Phusadee Arunmas
Deflation: A word that has kept popping up like a bogeyman or ghost, continually sending shivers throughout the Thai economy in recent years. Those fears have only intensified with inflation rates having reached their lowest point among Asean countries over the past three years.
The latest report by the Commerce Ministry on July 3 showing that inflation dipped for a second straight month in June has raised even more questions about the country’s deflationary prospects.
A casual observer may jump to that conclusion based on the two straight months of negative inflation, the stubbornly tepid economy tepid and poor private consumption, with the government’s ongoing economy stimuli remain far from yielding any fruits.
But economists from both the government and private sector insist Thailand is far away from the deflationary edge, and two consecutive months of negative inflation do not imply deflation, but rather reflect weak purchasing power.
Deflation is a condition under which the prices of goods and services fall for six months in a row as people spend less, leading manufacturers to cut prices.
“Thailand has yet to experience any deflation. The country is only facing negative inflation,” said Amornthep Chawla, head of research at CIMB Thai Bank. “The Thai economy is still in a growth mode, albeit at moderate rate.”
Mr Amornthep said deflation constitutes a long period of negative inflation and economic stagnation — a state which does not in any way characterise Thailand.
He said despite the negative headline inflation over the past two months, Thai core inflation remains positive.
According to the Commerce Ministry’s report, core inflation, which excludes fresh food and energy products, edged up 0.45% year-on-year in June and reflected a 0.08% month-on-month increase from May.
Headline inflation, which is based on 422 products and services, fell 0.05% in June from a year earlier, after a 0.04% decline in May. But on a monthly basis, the rate rose 0.02% from May because of increases in oil and fresh vegetable prices.
For the first six months of the year, headline inflation rose 0.67% on an annual basis, with core inflation up 0.56% from the same period last year.
Pimchanok Vonkorpon, director-general of the Commerce Ministry’s Trade Policy and Strategy Office, insisted the lower inflation was largely attributed to a drop in prices of fresh fruits and vegetables, for which supply has significantly increased in light of relatively high prices because of the widespread drought.
“Higher costs and expensive products that many people have seen may stem from other non-food expenses such as phone fees, expressway fees and coffee,” she said.
But Mr Amornthep warned the fall in prices for two straight months reflects the weak purchasing power of consumers, which will put pressure on producers.
He said negative inflation also occurred last year, but the cause was different as it was spurred by supply-side factors, while the current negative inflation is a result of demand-pull pressure.
“As purchasing power remains weak, producers are not able to pass on higher costs to consumers by increasing the price of goods,” said Mr Amornthep. “As a result, these producers will have to take on the burden of higher production costs by themselves.”
He said another implication of the negative inflation is it will prevent the private sector from investing more, as negative inflation implies the prices of goods produced may fail to increase in the future.
“As producers do not expect the price to increase, they are less likely to increase their stock of goods and invest more,” said Mr Amornthep.
He said in terms of cost of living, lower crop prices are the key component causing lower inflation, decreasing the income of agricultural households and weakening their spending ability.
Mr Amornthep said the consumer price index, which is used to gauge the inflation rate, is based on a basket of goods and services for the average Thai citizen, so it may not reflect the real cost of living for a person in a city.
Somprawin Manprasert, chief economist and executive vice-president at Bank of Ayudhya (BAY), said the country has not registered deflation as the two months of negative inflation were mainly because of the supply-side effects from lower fresh food prices compared with the same period last year.
“BAY believes inflation will edge up in the second half this year from smaller base effects and stronger demand-led inflationary pressure,” he said.
Mr Somprawin said the supply-led negative inflation will help increase people’s real income, supporting the recovery in domestic consumption.
He said despite the low inflation, the Bank of Thailand’s Monetary Policy Committee is expected to keep its policy rate steady at 1.5% to support the ongoing economic recovery.
“The easing monetary conditions are expected to remain to support a recovery until the central bank starts to see clear signals of a recovery in private investment,” said Mr Somprawin.
Jaturong Jantarangs, assistant governor of Bank of Thailand’s monetary policy group, said demand-pull inflationary pressures also remain low.
“Lower fresh food prices because of higher production of agricultural products this year along with a decline in global oil prices will put pressure on headline inflation to stay relatively low for some period,” said Mr Jaturong. “Looking ahead, inflation is expected to gradually increase in the latter half of this year and hit the lower bound of the target in the fourth quarter.”
The central bank cut its core inflation forecast for this year to 0.6% from 0.7% because of the decline in processed food prices, which accounts for 28% of the basket.
Nipon Poapongsakorn, a distinguished fellow at Thailand Development Research Institute, said the drop in inflation is not a major concern, as prices over the last two months were comparable with a relatively higher base in the same period last year.
“It’s a seasonal factor most people haven’t realised,” said the veteran economist. “People still see the overall products remain expensive as Thai economic growth is pretty slow.”
TMB Analytics, the economic analysis unit of TMB Bank, said the extremely low inflation in the past three years can be attributed mainly to the drop in transport and electricity costs driven by a major decline in energy prices.
Government support has kept a lid on price growth in education and healthcare, while subdued communication price changes are caused by strong competition among service providers, said the research house.
Besides the supply-side factors, weak demand or a fragile economy can also contribute to low inflation, said TMB Analytics. In the past three years, Asean countries with low inflation also exhibited low GDP growth and weak private demand.
“Be careful when talking about low inflation as a side effect of a weak economy, as inflation is strongly influenced by the supply side and government intervention as well,” warned the research house.
As purchasing power remains weak, producers are not able to pass on higher costs to consumers by increasing the price of goods. AMORNTHEP CHAWLA Head of research, CIMB Thai Bank