Inflation could reach double digits in August: research house

"What's happening here is the after-effects of monetary tightening," Trevor Greetham, Fidelity's London-based asset-allocation director, said yesterday in an interview with Bloomberg Television in Hong Kong.

"If you want to speculate, this stagflation could last a while, because of inflation targeting by central banks in the developed economies."

DBS Group Research's report released on Monday said the Thai government last week announced the upward revision of taxi fares (12 per cent) and bus fares (4-20 per cent) and the removal of temporary price controls on many consumer goods.

This, coupled with continued rises in crude-oil prices this month, should push inflation sharply higher year on year, to 8 per cent and 9 per cent in June and July, respectively, DBS Group Research said.

"In fact, given these price revisions, there is a material chance that inflation will hit double digits in August, albeit temporarily," it said.

As domestic demand recovery is thwarted by political worries, most of the rise in inflation is a temporary rise in "price level" rather than a rise in "underlying inflation".

The fact that core inflation is also rising is no evidence the rise in prices is not a one-off.

"The key for the inflation outlook is the strength of domestic demand. If domestic demand looks well below potential, the price rise is likely to be a one-off. Still, if food or fuel prices do not ease, average 2008 inflation might hit 7.6 per cent, higher than our current forecast of 6.4 per cent," the research house said.

The Bank of Thailand's rate hikes may start from the next policy meeting in the middle of next month and also exceed 50 basis points in all.

With no end in sight to the political uncertainties, the DBS Group expects domestic demand to remain weak. With that backdrop, a series of rate hikes could further hurt demand and growth.

Meanwhile, Asian currencies fell, led by the baht, on concerns that rising energy prices would fuel demand for US dollars and fan inflation in the region.

The baht has been the worst performer in Asia this month, as foreign investors cut holdings of local stocks, and importers buy dollars to pay for more expensive fuel.

The baht declined 0.4 per cent to 33.57 to the dollar yesterday morning, data compiled by Bloomberg show. The currency may drop to 35 by the end of September.