Thailand registered a second consecutive monthly decline in headline inflation, reaching its lowest level in 33 months in November, while the Commerce Ministry recently predicted the rate will decelerate again in December.
These developments have raised concerns about heightened risks of both an economic slowdown and deflation in Thailand.
Q: What is deflation?
Deflation is a condition when the prices of goods and services fall over a period of time as people spend less and delay their purchases in anticipation of lower prices, leading manufacturers to cut prices and earn less. This leads to an economic slowdown, investors delay their investments, and ultimately the money supply in the system declines.
According to the definition provided by the Organisation for Economic Co-operation and Development and the World Bank, deflation is characterised by three key indicators: the inflation rate is below zero (negative inflation); the inflation rate has continuously contracted for at least one quarter, reducing the prices of most goods and services, not only specific items; and economic indicators such as overall GDP, private consumption, investment, unemployment rates, and exports of goods and services move in a negative direction.
Q: Is Thailand heading towards deflation?
Poonpong Naiyanapakorn, director-general of the Trade Policy and Strategy Office, said Thailand's headline inflation, as gauged by the consumer price index, was below zero for two consecutive months (-0.31% year-on-year in October, -0.44% in November). The primary cause was the government's support measures reducing prices for some types of fuel and electricity bills, which account for roughly 13.7% of the inflation calculation.
The prices of certain types of food and non-alcoholic beverages also declined, such as meat (accounting for 9.09% of the inflation calculation), which fell because of high production quantities, and processed food (2.37% of the calculation), which dropped based on lower costs and raw materials since May 2023.
However, rice, eggs, dairy products and fresh vegetables recorded price increases in November.
A list of 430 goods and services are used to calculate inflation. In October, 92 items had reduced prices, 295 items had increased prices, and 43 items were unchanged. In November, 92 items had reduced prices, 291 items had increased prices, and 47 items were unchanged.
For the first 11 months of this year, headline inflation was 1.41% year-on-year, with core inflation averaging 1.33% during the period.
Thailand's inflation rate for 2023 is expected to tally 1.35%, falling within the target range of 1-3% set by the Commerce Ministry.
Q: What do the economic indicators show?
Mr Poonpong said the economy remains on course for continued growth.
Thai GDP in the third quarter expanded by 1.5% year-on-year, continuing a positive trend since the fourth quarter of 2021. Both public and private research houses anticipate Thailand's economy will expand this year at a rate similar to the previous year, growing further in 2024.
Private consumption in the third quarter grew by 8.1% year-on-year, while the unemployment rate was 0.99%, the lowest in 15 quarters. These figures aligned with the number of individuals covered under Section 33 in the social security system, which expanded by 11.8% in the third quarter, up from an 11.7% gain in the second quarter, reflecting a continued labour market recovery.
Total investment in the third quarter increased by 1.5% year-on-year, driven by an acceleration of private sector investments, reflecting consistent growth since the third quarter of 2022.
Shipments for the period rose by 0.2% year-on-year, demonstrating sustained growth for high-value service exports. Service exports expanded by 23.1% for the quarter, while goods exports increased for three consecutive months (2.6% in August, 2.1% in September and 8% in October).
The Commerce Ministry predicts Thai export trends in 2024 will improve compared with 2023, based on a global economic recovery after inflation returns to target levels and interest rates stabilise. Private sector economic activities are gradually adjusting, but the recovery of trading partners may vary depending on the economic challenges each country faces, said the ministry.
Although industrial production has declined, the service sector in the third quarter expanded by 3.9%, showing consistent growth since the second quarter of 2021.
Mr Poonpong said based on all these factors, Thailand is not experiencing deflation and there are no significant signs for concern.
However, household debt has continued to inch up and economic growth the past three years has been lower than previous years, he said.
Q: Do economists consider the inflation level appropriate?
Nattaporn Triratanasirikul, deputy managing director of Kasikorn Research Center, said the disinflation for two consecutive months should not lead to concern about deflation.
The decrease was attributed to government subsidies, mainly for electricity prices. Core inflation slid only marginally, while the country's economic growth is estimated at 3.2% next year and could reach 3.8% if the digital wallet plan is implemented according to the government's plan, according to Ms Nattaporn.
The lower inflation could imply some groups of consumers have weaker purchasing power, despite government assistance to lower their cost of living, she said.
"I think the current rate of inflation is appropriate based on Thai GDP growth and does not require the Bank of Thailand to urgently cut interest rates to simulate growth," said Ms Nattaporn.
Thanavath Phonvichai, president of the University of the Thai Chamber of Commerce, said the decline in headline inflation last month stemmed largely from the ongoing reductions in energy prices, electricity costs, and global oil prices, which are down to less than US$70 per barrel.
However, he deemed the drop in prices for certain fresh food items and consumer goods as abnormal.
These figures reflect Thailand has a fragile economy, while consumer spending trends indicate the public is still concerned and cautious about outlays, said Mr Thanavath.
Hesitant spending could signal the beginning of a deflationary phase, and policies such as lowering interest rates may be required, indicating a potential urgent need for economic stimulus, he said.
A private sector sentiment survey in November found businesses are starting to lose confidence, expressing concerns about the economy. This was attributed to a tepid foreign tourism market, predicted water shortages because of the impact of El Niño in the agriculture sector, and lacklustre exports as the global economic slowdown weighs on demand.
Thai GDP, projected to grow by 4%, may lose purchasing power because of high levels of household debt and rising production costs, particularly as electricity prices trend higher, said Mr Thanavath.
Q: What is the expected trend for inflation in Thailand?
The inflation trend for 2024 is continued deceleration, supported by the government's ongoing aid measures to ease the cost of living, especially for retail prices of fuel and electricity, which are essential commodities affecting inflation rates the past three years, said Mr Poonpong.
In addition, limited price increases are expected for key goods, while the global economy may slow, including major Thai trading partners such as the US, China and Japan.
Elevated household debt levels may exert pressure on certain groups' consumption levels, he said.
Mr Poonpong said risk factors that could affect inflation rates include geopolitical conflicts in Gaza and Ukraine, which could alter the prices of essential consumer goods, in addition to fluctuations in the baht based on the impact of the Thailand's monetary policy as well as the implementation of support measures.
