Thailand’s inflation rises 4.1% in September

Inflation has shown surprising momentum in September especially if seen against the background of the 5-10% reduction in retail fuel prices in late-August. Headline inflation printed 4.1% (YoY) yesterday, higher than median and our forecast of 3.9%.

Core inflation registered 2.9% (YoY) and 2.8% (MoM, saar), close to the upper limit of the current 0.5-3% inflation target range.

The breakdown of the data poses further cause for concern: the higher core and headline prices were not driven by a spike in food prices as might have been expected given recent floods. Food prices contracted in sequential terms by 2% (MoM, saar). Instead, price pressures broadened to housing and furnishing and recreation and education segments.

All this will not comfort the government or the central bank coming ahead of further expansionary fiscal spending by the government. In the next couple of months, headline inflation is set to worsen on higher rice prices. Given the near-3% weight of rice in the CPI basket, and assuming a 30% increase in local rice prices from October to February as a result of the rice policy, would mean inflation gets bumped up by 0.24% (MoM, sa) or 2.9% annualized each month. This would push headline inflation higher to 4.4% in the next couple of months and push core inflation well above 3%.

The rising core inflation rate and the still strong external and domestic data outlook suggest the central bank can at best temporarily pause the rate hiking cycle but not end it even if the inflation target is revised substantially higher as flagged. All this, of course, assumes the market’s worst fears about the economy or Europe doesn’t play out.