Inflation is, and will be, the number one economic issue of 2022. All countries are facing rapid rises in consumer prices which is threatening not only their economic recovery from the Covid outbreak but also the stability of many governments. The US consumer price index (CPI) hit a 39-year high at 7% in December 2021, prompting Goldman Sachs to predict that the Federal Reserve Board might raise interest rates four times this year.
In Thailand, even though the December 2021 CPI was just 2.2%, producer price index (PPI) inflation is already at 7.7%, which implies that much higher prices await consumers this year. So far the theory seems to be proving correct and consumer prices resemble the onset of an exploding volcano. I am curious to see what the January CPI will look like, as certain food prices are already at least 10% higher than in December.
Giving the serious threat posed by inflation, I am seeing little in the way of economic analysis or productive comments on the issue from economic research institutes, public or private. The Bank of Thailand, which is directly responsible for containing inflation and has set the inflation control target at 2.5%, remains mute. Without having to wait for any official data for confirmation, consumer price inflation of 2.5% must already have been breached, judging from recent price movements. The next Monetary Policy Committee meeting is on Feb 9. Will we hear anything meaningful on inflation issues?
If no economist is willing to do the job, I will do it for Bangkok Post readers.
There are four questions pertaining to inflation that I would like to answer. First, why now? Why are inflation rates rising so fast and hitting record highs?
Second, how long will this last? At the onset of the inflationary trend, many economists, including the chairman of the US Federal Reserve Board, believed the rising prices would only be temporary, caused by Covid-induced supply chain disruptions. But some economists are now changing their minds after examining global supply-demand conditions. Third, what would the right policy responses to inflation be? Turkey is implementing the wrong policy response and it is paying dearly. Fourth, what are the implications for Thailand's economic outlook for 2022?
Tough questions? Yes, but I'll try my best to tackle them. Supply chain disruption is not the only cause of rapidly rising commodity prices around the world. True, this was the main cause in the first half of 2021, but in the latter half of that year, the pandemic situation improved due to the success of vaccination drives. If supply chain disruption was the only cause, the world would see commodity prices dropping by now, as the Fed's chairman once hoped.
The culprit is the rapid rate at which the global economic recovery has been taking shape, resulting in a sharp rise in demand. The International Monetary Fund (IMF) estimated the world economy grew 6% in 2021, and projected it would grow another 4.9% this year. Meanwhile, China's economy expanded 8.1% in 2021, according to official data. Such strong global growth drove commodity prices crazy last year.
Compared to 2020, prices of agricultural products rose 23.5% while energy prices jumped 82.1% last year. Worst of all, raw materials like maize (for animal feed) climbed 56.8% and the price of fertilisers rose 80.6%. The food price inflation in excess of 10% that we are seeing now is just the tip of the iceberg. All cited prices come from the World Bank Commodity Price Data, or so-called Pink Sheet.
The answer to the first question makes the second question easy. As growth is projected to remain strong in 2022, high prices look like they are here to stay this year. Food prices are likely to be even higher as the cost of raw materials like animal feed and fertiliser has yet to be fully transferred to food prices like meat, vegetables, cooking oil, and so on.
The answer to the third question is theoretically easy to answer but extremely difficult to implement in practice. When demand is too strong, authorities have to tame demand by implementing tight monetary policy and prudent fiscal policy. The correct monetary policy in such cases includes raising interest rates enough to keep real interest rates positive. For instance, the Bank of Thailand's policy rate is now 0.5%. If inflation hits 4% in 2022, this should be raised by 3.5%. This is the theory, of course. In reality, the central bank could do less -- but doing nothing would be a grave mistake.
Turkey's wrong decisions have resulted in economic disaster. In April 2021, it saw inflation reach 17%. Using the kind of monetary policies described above, the Bank of Turkey raised interest rates from 17% to 19% to keep the real interest rate positive. Turkish President Recep Tayyip Erdogan was furious and fired the deputy governor of the Bank of Turkey. (The governor was fired one year previously.) In President Erdogan's view, high interest rates would raise the cost of production which, in turn, fueled even higher inflation. To comply with the president's policy, the domestic interest rate was cut from 19% to 14%. The result? Turkey's inflation rose from 17% in April to 36.1% in December 2021.
Obviously, a big mistake. But monetary policy is not the only tool to curb inflation. Fiscal policy can be equally effective. The government must cut its expenses to hold down domestic demand. Yet the current move to stimulate consumption (Phase 4 of the so-called half-half co-payment scheme) will surely cause more inflation.
So what is the country's economic outlook for 2022 amid rising inflation, a cash-strapped government, and inadequate domestic liquidity? First, the Thai government -- much like the Turkish government -- will favour economic growth over controlling inflation by spending even more. Fortunately, a weak fiscal position and the country's limited domestic liquidity will prohibit the government from going on a spending spree. Second, the Monetary Policy Committee will only marginally raise interest rates for fear of creating bad loans. Third, foreign capital will leave Thailand like it is leaving Turkey. As of now, the five-year Treasury yield in the US is already higher than the Thai government's five-year bond yield. Fourth, measures to control inflation will be gimmicky and not helpful for Thai consumers -- like asking manufacturers to hold their prices despite rising material costs, or offering limited discounts.
I now get why economists are avoiding analysing inflationary issues. They have no good solutions.