Thailand’s headline inflation of 4.3% well above expectations

Inflation (August, yesterday) came well above expectations. Headline inflation registered 4.3% (YoY) vs market consensus of 4% and core inflation accelerated to 2.85% (YoY) against a forecast of 2.6%.

The data breakdown shows while food inflation continues to be the main driver, housing prices and transport costs are also picking up pace. If not for the various subsidies still in place (diesel, cost-of-living subsidies), inflation may be much higher, possibly closer to the peak in 2008. Food and oil prices may not appear to be demanddriven inflation at first glance. But higher commodity prices are in no small part driven by demand in emerging markets, including Thailand. As such, rising inflation sends a clear and loud signal to the central bank to continue to maintain its hawkish policy stance and tighten policy further.

Money and credit data too point to inflation risks. Broad money growth registered growth of 17% (YoY) in July and in 2Q and the sequential growth pace picked up in July (to 22% MoM, saar). To be sure, the government’s new policy to lower fuel levies and public transport fares will suppress inflation in the short-run.

The estimated 4-9% reduction in public transport fares may reduce sequential inflation by 1%(nonannualised) given the large weight for transport in CPI. This and the uncertain global outlook may even lead the central bank to pause in its rate hiking cycle when it meets next in early October (depending on prevalent sentiment then).

But the direction is clearly for further monetary tightening, and if inflation and money stay as high as they are currently, it may not be wise for the central bank to stop with rate hikes even after policy rates are lifted to 4% (DBS forecast) from the current 3.50% rate.