Stagflation is now a reality for Thailand

Stagflation is now a reality for Thailand

Customers sit at eateries on Bangkok's Bantadthong Road. Thailand is undergoing stagflation, with its economy suffering both a slowdown and high inflation at the same time, says economist Chartchai Parasuk. 
Customers sit at eateries on Bangkok's Bantadthong Road. Thailand is undergoing stagflation, with its economy suffering both a slowdown and high inflation at the same time, says economist Chartchai Parasuk. 

I first encountered this word, a combination of "stagnation" and "inflation", in an economics textbook. Stagflation depicts an unusual situation whereby an economy experiences both a slowdown and high inflation at the same time. A textbook example is the US economy of the early 1970s, which suffered 9% unemployment along with 12% inflation. The culprit was a doubling of world oil prices which pushed the US economy into a recession and raised the cost of goods and services.

Fast forward 50 years and, believe it or not, stagflation is now being experienced in Thailand.

The stagnation needs no explanation, but the inflation sure does. The reason being official inflation figures are in sharp contrast with everyday price pressures that Thai consumers are experiencing. According to government statistics, the consumer price index rose a mere 0.1% in October this year. Food prices increased by an average 2.2% while non-food-product prices fell by 1.1%. If you trust these numbers, Thailand has practically no inflation.

We consumers would wholeheartedly disagree. In a survey conducted by Suan Dusit Rajabhat University (Suan Dusit Poll) in November this year, 65.5% of respondents identified the high cost of living as Thailand's most troubling economic problem. Surprisingly, only 39.2% chose the sluggish economy as the most serious problem. The respondents were not wrong. The slowing economy is affecting individual consumers differently, but the higher cost of living hits everybody (hard) every time they pull out their wallets.

The explanation of why official inflation figures are amazingly low is rather technical. However, I can assure you the price of lunch at the Ministry of Commerce or Bank of Thailand's cafeterias has not increased by 0.1%, as their own inflation numbers indicate. When the price of a bowl of noodles or plate of khao kang (rice with curry) jumps from 35 to 40 baht, that is a 14.3% increase. Whatever the government data is showing, Thai consumers, including employees at the ministry and central bank, are not paying that price.

Let's put the issue of government data versus consumer reality aside. The big question for economists and policy-makers is why prices are rising in a slowing economy. Why is the sacred law of supply and demand not working? US stagflation in 1974 can be explained by the external oil price shock. But how do we explain Thailand's case now?

I could be mean and say that it's not my job to find the answer. It's the job of the government to find the answer to this crucial economic question and to fix the problem fast. Failure to do so increases the risk of dissatisfied Thai consumers coming out to protest on the streets. In Chile, over one million of Santiago's 5.4-million population have joined anti-government protests over the high cost of living. If you think Chilean inflation figures must be high to warrant such mass protests, you couldn't be more wrong. Chile's inflation rate is only 2.5%. Again, government statistics must not be reflecting the real situation.

This is a technical problem with aggregated macroeconomic data like gross domestic product and inflation. Current methods of data compilation are okay for simple and static economies. But nowadays economies around the world are too complex and dynamic for these aggregates to accurately capture the real situation. New economic indicators must be devised to reflect the "real" economy. Without them, you have a situation like Thailand's, where the government cites official data to say the economy is doing okay but the people cry they are suffering.

I spent the last few days thinking up sensible explanations for high living costs. My first thought was the internal supply disruption in Latin American countries. Venezuela is one example. In many countries -- particularly after wars -- prices rise quickly due to shortages of supplies. But in Thailand there is no supply disruption of any kind. The Thai production system is intact, and the distribution network is working fine. If anything, Thailand's production system is running at 20% below its potential since the current capacity utilisation is a mere 62.8%. There is plenty of room to produce more, if the market demand grows. But if supply shortage is not the cause of rising prices, what is?

Another possible explanation is import-driven inflation. But with a strong baht, there is no possibility of higher-priced imports. In fact, the strong baht is helping to lower domestic prices.

I finally got the answer yesterday while I was having my hair cut. My barber raised his fee from 180 baht to 200 baht, citing the higher living cost. Of course, the 11.1% jump in haircut price bears no correspondence with the official 0.1% inflation rate. But I doubt that his cost of living has actually risen 11.1%. So, I gently questioned him further, concerned just a little that my haircut might turn out terrible. Well, it emerged that higher living costs were not the real reason for the fee hike. He, like other Thai consumers, has absorbed higher prices by lowering his consumption in order to keep his budget fixed. For instance, when the price of khao kang topped with a fried egg rose from 40 baht to 50 baht, he skipped the egg in order to keep his outlay at the 40-baht level. Smart consumer!

The necessity for the fee increase arises from higher fixed costs per customer. But if the number of customers decline by 20-30%, the fixed cost per customer automatically increases by 20-30% as well. With higher costs of production per unit, my hairdresser -- along with aunties at the Commerce Ministry and Bank of Thailand's cafeterias plus other producers in Thailand -- have to raise the price of their products. Hence, the higher cost of living for all citizens.

What items come under the "fixed cost" column? Rent, employee salaries, utilities, and necessary business expenses like monthly loan repayments. Therefore, we could conclude that, in today's world -- not the textbook world -- a sluggish economy will bring higher inflation.

So, what economic policies should be imposed to combat "effective" inflation stemming from the fixed cost problem, before we see Chilean-style protests on the streets of Bangkok? Thankfully, it is not my responsibility to answer that question.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.


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