Double-digit inflation 'now entirely possible'

With rising energy prices, double-digit inflation is now entirely possible, though the rate is expected to peak at above 9 per cent in August, according to SCBS Economics Research.

The research unit also expects wage growth and inflation to slow towards the end of the year, as well as export growth to decelerate in response to the global economic slowdown. This will put pressure on nominal wage growth, as it is sensitive to export revenue in baht terms.

So far, strong wage growth has been observed across the board, led by the agricultural and manufacturing sectors.

There was double-digit wage growth in almost all sectors except education, electricity supply, financial intermediation and fishing.

Wage rates in the agricultural sector - employing 38 per cent of the labour force - saw an increase of more than 50 per cent year on year in the first quarter, up from 5.5 per cent in 2007. The manufacturing sector - 16 per cent of the labour force - registered wage growth of 17 per cent in the quarter, up from 3.5 per cent in all of last year.

"Actual first-quarter wage growth this year was higher than we had anticipated," stated the research.

Figures are positive for domestic consumption. The higher-than-expected wage growth - 18 per cent in nominal terms and 13 per cent in real terms - supports a recovery in domestic consumption.

This is seen in the growth of private consumption of 2.6 per cent year on year in the first quarter, compared to 1.5 per cent in all of 2007. Nominal and real wage growth was only 3 per cent and 0.7 per cent, respectively, last year.

This increases the upside risk to inflation this year. Strong wage growth indicates rising production costs and spending power. These forces combined will push prices upwards. Nominal wage growth has a high correlation with headline inflation, which has been 70 per cent since 1998.

Prices for rice - an important agricultural product of Thailand - are also expected to decline on increasing output with new harvests, said the research, adding that this caps the growth of agricultural wages.

Tisco Securities has also recently raised its forecast for 2008 headline inflation from 5.8 per cent to 6.7 per cent to reflect the latest jump in oil prices and a 26-per-cent year-on-year increase in global agricultural prices. According to a Bank of Thailand study, a 1-per-cent increase in the Dubai oil price directly raises headline inflation by 0.05 basis points, assuming that food prices remain the same. Rising oil prices also affect the producer price index and the headline inflation rate at a faster pace than core inflation.

According to Tisco's forecast, headline inflation rates could rise to 7.3 per cent year on year if oil prices are maintained at US$120 (Bt4,000) per barrel, and 8.1 per cent if prices stay above $130.

"We expect an increase in the factors contributing to inflationary pressures in the non-oil and food sectors. These factors include wage increases, supply constraints, a weaker baht exchange rate, the lifting of the ceiling on domestic liquefied petroleum gas prices and a possible increase in interest rates. Accordingly, we expect core inflation to accelerate in the second half," Tisco said.