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PARISTA YUTHAMANOP and PHUSADEE ARUNMAS
A major headache faced by economic policymakers worldwide in 2008 is how to best handle soaring inflation. Rapid price increases, which for a time were limited to emerging countries with phenomenal growth like China and Vietnam, have now turned into a worldwide epidemic and even Thailand is not spared.
Locally, headline inflation, as measured by the consumer price index, sped to a 10-year record of 7.6% year-on-year and 2.1% month-on-month in May. Year-on-year headline inflation averaged 5.8% in the first five months of 2008.
If the prices continue to increase on par with the pace seen in May for a few more months, the inflation in 2008 could break the record 8% seen during the 1997 economic crisis.
Core inflation, which excludes fresh food and oil prices, increased 2.8% year-on-year in May and 0.7% from April. The pass-through effect of oil to demand has accelerated, considering the core inflation stood at just 1.9% on average in the first quarter.
The producer price index, which measures product prices at the factory, showed that inflationary pressure was in the pipeline. Its pace quickened to 16% in May from 13% in April and 11% year-on-year from the average increase in the first quarter. The index is in line with the increases in raw material prices in the world market.
Pundits say the world has entered an era of permanent commodity-price shock. The claim is validated, judging from the fact that world demand for oil has a slim chance of receding as the incomes of people in emerging economies, especially China and India, are surging while the supply from oil producers stays put.
The prices of crude oil soared 30% in the first quarter of the year from the average prices in 2007. And in a recent official estimate, policymakers said oil prices in 2008 under a pessimistic scenario could jump by 80% from 2007.
In many countries, the inflation has already reached highs not seen for many years. High fuel and food prices have led to public outcries in many countries and unrest in some. The situation is likely to worsen once their governments can no longer bear the burden of fuel subsidies any more.
For Thailand, inflation is vulnerable to changes in oil prices because most goods are carried by road. Therefore, oil and fresh food account for 70% of the consumer price index's total weight. That the consumer price index comprises many products under price controls may well reflect upward pressure as well.
Rising inflation was a major factor leading to a fall in consumer confidence to a six-month low in May. An official survey showed a marked an increase in the number of respondents who believe that inflation will accelerate.
The Bank of Thailand has forecast that the Thai economy will grow 4.8% to 6% in this year. In any case, it is widely expected to revise its headline inflation forecast upward from 4-5% in line with relentless surges in oil prices.
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