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Published on April 25, 2008

Anoma Srisukkasem

The Nation

The Bank of Thailand is keeping a close and critical eye on food and energy prices after an inflation report found they were playing an increasingly significant role in driving up the cost of living.

"The Monetary Policy Committee agrees to analyse and evaluate in depth relevant risks to changes in the prices of raw foods and energy rather than on a regular basis," the report said.

The central bank said there was an increased risk that rises in raw food and energy prices would speed up at a much faster pace than other goods.

Their impact on purchasing power and inflation expectations could deepen, particularly when price increases persisted for a limited time while demand remained high and supply limited.

Oil accounts for 9 per cent of the basket of goods used to calculate the consumer price index, compared with 15 per cent for raw food.

High demand, particularly from China and India where high economic growth continues, as well as the popularity of commodity investment will peg oil prices at their high level, central bank officials said.

Alternative energy production has also expanded rapidly but could not meet the tremendous demand, they said. This adds to Opec's rising influence over the market, as the oil supply is less sensitive to price adjustment.

The unsettled geopolitical situation in the Middle East and Africa, global warming and speculative investment will constrain the ability to roll with the shock.

"The oil price is likely to accelerate and remain volatile through several rounds and float at a high level," the officials said.

Rising demand for farm goods, especially from China and India with 2.5 billion of the world's population of 8 billion, and biofuel production will push up food prices incessantly.

Expansion of food supply is limited while stocks have dropped precipitously, worsened by the frequency and severity of natural disasters.

"The prices of oil and food earlier did not move in the same direction but they do now after farmers turned to alternative production," they said.

Kasikorn Research Centre urged the government and food-related agencies to speedily improve the production process and marketing for agricultural goods to counter price rises and volatility.

It said the government should stress research and development in agricultural technology to boost productivity. It should also introduce a water-resource management plan to serve demand in the agricultural industry.

The government must draw up a long-term strategic plan for agrarian land use - zoning for food, alternative energy, livestock and other commercial crops, the company added.