Outside View

Headline inflation, more commonly known as the consumer price index, is a measure of the total inflation within an economy. This is different from core inflation, which excludes factors such as food and energy costs. In another words, a switch to headline inflation would base the Bank of Thailand's target on the consumer price index.

More and more countries have chosen their consumer price index as a target variable for inflation. Australia did so in 1998, Brazil, Canada Chile, Columbia and the Czech Republic in 2002, Hungary, Iceland, Israel, Mexico, New Zealand in 1997, Norway, Peru, the Philippines, Poland and South Korea in 2007 and South Africa and Sweden in 2004. The United Kingdom also did so in 2004, and its treasury recommended that the target be the same as that of the European Central Bank.

According to Claes Berg, adviser to the governor of Sveriges Riksbank, which is Sweden's central bank, the Consumer Price Index (CPI) is an appropriate target variable for monetary policy for several reasons: it represents a costofliving index that maps the development of prices for an average basket of goods and services; it is well known and published regularly, and stabilising the CPI facilitates consumers' decisions in a market economy.

I recently talked to an executive of South Korean's central bank, the Bank of Korea. We saw eye to eye on the Bank of Korea's decision to change from targeting core inflation to targeting headline inflation or CPI, agreeing that CPI was much more familiar and relevant to the general public. The general public understands CPI easily and information about the CPI is timely and more readily available to the public.

I personally think that setting or benchmarking an inflation goal against CPI is better than against core inflation for the abovementioned reasons, as well as because it will make the Bank of Thailand more mindful of the general public.

With CPI as the target, the Bank of Thailand will in effect become more accountable to the public. This will pose a big challenge to the Bank of Thailand and make its job harder.

With headline inflation or CPI being much more volatile and having some components outside the Bank of Thailand's control, it would not be quite fair to measure the Bank of Thailand's performance on the yearly outcome of CPI. Moreover, monetary policy has a lag period, in another words it may take six to 24 months for interestrate policy to have any effect or unleash its full effect on the economy. Thus maintaining CPI within the target range of the BOT would be more difficult than maintaining core inflation within the range. The BOT will probably need time to get the desired result.

To solve this problem, I suggest using a mediumterm target such as three years, instead of an annual target, which would be difficult to achieve and subject to frequent change, thus possibly undermining the credibility of BOT monetary policy. However, the BOT should narrow its inflation target band as well. Set as it is now at 3.5 per cent it is too wide.

In conclusion, I support the central bank's move to target headline inflation or CPI. The result will be that the public, including businesses in Thailand, can make more effective and correctly calculated investment, savings and spending decisions based on the known and relevant inflation target set by the central bank.

The views expressed in the article are his own.