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Economists fret about household revenues as central bank ponders rate hike.
By Wichit Chantanusornsiri
Kanit: Hike won't dent oil-fuelled inflation |
The numbers alone seem bad enough, with inflation hitting a 10-year high in May at 7.6%.
But the consumer price index, the main measure of inflation used by policymakers, is a rough guide at best. Ask the average person on the street about the economy, and the answer may be much worse.
Take jasmine rice, a staple food consumed by millions of households each day. Prices have soared to over 200 baht for a five-kilogramme bag this year compared with 125 baht last year. Walk into a food court or sit at a sidewalk food stall, and single dishes now cost 30 to 35 baht each compared with 20 to 25 last year.
Transport costs have also risen, with the doubling in world oil prices spurring a rush by motorists to install cheaper NGV or LPG kits. Mass-transit systems have not been immune either, with taxi, bus and motorcycle fares all up sharply thanks to higher pump prices.
For economic policymakers, the rise in prices indicates that economic growth is almost certain to slow in the second half as consumers are forced to spend more on basic essentials.
''Inflation has put the lid on private consumption,'' said Ekniti Nitithanprapas, the director of the macroeconomic analysis group at the Fiscal Policy Office.
The FPO, a unit of the Finance Ministry, had initially projected private consumption rising 4% this year. But the forecast was based on an inflation projection of 4.5% for the full year, a figure that now looks wildly overoptimistic, considering that prices rose 5.8% for the first five months of the year.
For the ministry, the main strategy for combating inflation has been to put more money into people's pockets, through higher tax exemptions and credits for small companies, listed companies and individual taxpayers.
State agencies have been directed to accelerate spending under community development programmes such as the People's Bank microfinance programme or the SML village grant programme.
But with world oil prices nearing $140 per barrel, the relief gained from the revenue programmes have failed to compensate for the rise in prices. Authorities are now considering direct handouts to the poor, in the form of coupons exchangeable for basic foodstuffs and consumer goods.
Yet while authorities ponder ways to increase household revenues, the options available for checking inflation seem more limited.
Most analysts expect the Bank of Thailand to begin tightening monetary policy starting at the next Monetary Policy Committee meeting on July 16. One-day repurchase rates have remained unchanged at 3.25% since mid-2007, and could rise by up to 0.5 points by the end of the year as the central bank, like others in the region, aim to clamp down on domestic demand to help stabilise prices.
But not everyone agrees that a conventional monetary approach is the best medicine, not when inflation is being driven by oil shock rather than higher demand.
''I personally don't believe that raising interest rates will help push inflation down, not when the primary cause for price rises is oil prices,'' said Kanit Sangsubhan, the director of the Finance Ministry's Policy Research Institute.
With few signs that domestic demand was increasing, an interest rate hike would likely push consumption further downwards even as prices stayed high.
Dr Kanit said a 0.25 percentage point hike in one-day repurchase rates, as speculated by the market, would have little impact on inflation overall.
He acknowledged that controlling inflation was difficult, and suggested that instead, growth needed to be emphasised to increase household income.
But Pisit Leeahtam, a former deputy finance minister, said the government's strategies toward inflation were piecemeal and failed to prevent profiteering or collusion by producers in raising prices.
More importantly, authorities needed to address inflation expectations to head off a wage price spiral, where workers demanded higher wages to compensate for inflation, which in turn only added to producer costs, pushing up prices.
But Dr Pisit, a former central bank economist, said he also disagreed that raising interest rates was the most prudent strategy, as higher rates would only further push up producer costs.
''The Bank of Thailand is arguing that interest rates must rise to control inflation. It's certainly a textbook response. But I think we must focus first on the suffering of the public from higher household expenses,'' he said.
Higher interest rates would have a profound impact across the economy, Dr Pisit added, and should only be taken once authorities were assured that the market operated without distortion and that prices were fairly settled.
Chodechai Suwanaporn, an economist for the Fiscal Policy Office, said one added complication in addressing inflation was the tendency for producers to raise prices in steps beyond actual inflation rates.
A noodle seller, when adjusting prices, would typically do so in steps of five baht, rather than smaller increments of two or three baht per dish.
Dr Chodechai said such behaviour stemmed from future expectations about prices, where producers chose to raise prices to cover for future inflation.
Somphob Manarungsan, an economist at Chulalongkorn University, agreed that authorities needed to adopt a more holistic approach to combating inflation.
Policy distortions and contradictions needed to be limited, he said, pointing to the rice paddy mortgage programme as an example that would only establish a floor under prices at the expense of consumers.
Uncertainties about policies and prices in turn was affecting investment decisions, which in turn would affect future supply and could result in stagflation for the economy, Dr Somphob said.
''Even worse is the fact that the economic problems will exasperate the current political problems, as more interest groups clamour for wage hikes from the government,'' he added.
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