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Published on April 3, 2008

But consumers have been urged not be overly concerned about declining purchasing power.

The Bank of Thailand (BOT) yesterday said inflation remained within its forecast range and under control. Economic assumptions and figures will be revised at a meeting of its Monetary Policy Committee (MPC) next Wednesday.

The Commerce Ministry said headline inflation reached 5.3 per cent last month, while core inflation - or headline inflation excluding raw food and energy prices - was 1.7 per cent.

For the whole first quarter, headline and core inflation averaged 5 per cent and 1.5 per cent, respectively.

BOT senior director Amara Sriphayak said inflation remained within the estimated range. Projected first-quarter headline inflation was 4-5 per cent, while core inflation was 1-2 per cent.

"Actual headline inflation was in the upper range of the forecast, and actual core inflation was in line with the projection," she said, adding that a decline in crude-oil prices and the Commerce Ministry's price-control policy could cool down worries over price hikes and keep inflation expectations intact.

The crude-oil price in the Dubai market is currently US$91 (Bt2,900) per barrel, higher than the BOT's baseline scenario of $85, but still lower than its worst-case scenario of $96 in the first quarter.

The BOT's estimated headline inflation rate for the entire year is 2.8-4 per cent. It believes inflation will gradually decline in the second quarter, but the speed of the fall will depend on oil-price assumptions.

However, consumers should not expect that prices will soon be sustainable, because higher-than-expected rises in minimum wages could put pressure on cost-push inflation. Workers have requested the lifting of minimum wages, because of the higher prices of goods and services, but higher-than-expected wage rises could lead to rising production costs and another round of price rises.

The BOT is downplaying the concerns, saying spiralling inflation will not occur if wage adjustments do not exceed the inflation rate.

Amid the price hikes, consumers may face the need to slow down their spending and buy only necessary items. Thus, inflation could erode the fragile recovery of private consumption, which is expected to be a key economic engine this year.

Amara is optimistic the government's latest measures will help bolster net income, resulting in continued spending. This will boost the economy in the period before implementation of the government's mega-projects.

A recent Citibank report said the latest core inflation figures would mean the policy-rate bias within the MPC would be neutral when the committee meets next Wednesday.

Previously, Citibank said it expected a cut of 50 basis points in the policy interest rate.

An unchanged policy-rate stance will imply that a greater weight is being attached to an elevated inflation risk, it said.

In addition, with higher-than-expected core inflation last month despite a strong currency effect, Citibank said it anticipated the potential for inflation risk peaking in the second quarter.

"This would definitely tilt the odds back to the policy rate easing in the second half of the year," the bank said, adding that core inflation risk was expected to stabilise in June, because upside risk from the Consumer Price Index for broad services and clothing might become diffused.

Anoma Srisukkasem

The Nation