Pandemic, e-commerce to influence headline inflation

Though domestic headline inflation is expected to return to the target band in mid-2021, upcoming inflation dynamics will be marred by changes in the global economic system from the pandemic and e-commerce business, says the Bank of Thailand.

The central bank’s Monetary Policy Committee (MPC) assesses headline inflation will gradually reach the target band of 1-3% by the middle of this year, supported by fiscal and monetary stimulus, a recovery in consumer purchasing power and higher fresh food and energy prices, said central bank governor Sethaput Suthiwartnarueput in an open letter to the finance minister.

The MPC and Finance Minister Arkhom Termpittayapaisith agreed on Dec 22 to maintain the headline inflation target at 1-3% for this year, and as the medium-term monetary policy target.

But structural economic changes stemming from the pandemic, trade conflicts and geopolitical risks could affect the global production supply chain and consumer prices going forward, said Mr Sethaput.

Structural changes accelerated by the pandemic, such as the rapid growth of e-commerce business and increased use of automation to reduce virus contagion and long-term production cost, may cause inflation dynamics to deviate from the previous assessment, he said.

The 12-month headline i nflation averaged -0.85% in 2020, falling below the 1-3% headline inflation target approved by the MPC and the finance minister.

A sharp fall in crude oil prices in the global market on the back of plunging oil demand and state measures to cut the cost of living through reducing electricity and cooking gas bills were the root causes of negative headline inflation, said Mr Sethaput.

Consumer prices in the energy category averaged -11.6% in 2020, a significant drop from an 8.87% expansion logged in the corresponding period of 2019, according to the central bank.

On the other hand, consumer prices measured in the fresh food category averaged 1.72% for the 12 months of 2020.

Last year’s core inflation expanded by a mere 0.29% because of restricted economic activities following virus containment measures, subsequently affecting employment, household income and consumer confidence.

Although headline inflation has been in negative territory since March 2020, this does not mean it qualifies as deflation, said Mr Sethaput, citing four factors.

The prices of goods and services have not continuously declined, and such decline has not been broadbased, he said.

Medium-term headline inflation expectations from economic experts remain in the central bank’s inflation targeting framework, while demand and employment have not plummeted for an extended period, said Mr Sethaput.