Thailand inflation dips to 2.69%

Thanks to food prices and housing cost slipping 4.02% and 0.7%.

According to OSK DMG, after rising by 2.73% in Jul, headline inflation eased slightly to 2.69% yoy in Aug in line with our expectations. Core inflation continued to ease, rising by 1.76% yoy in Aug from 1.87% in Jul (still well below the central bank’s target of “not exceeding 3%”).

Here's more from OSK DMG:

Helping to keep inflation in check were lower food prices and housing cost (together accounting for nearly 58% of the CPI basket), which eased to 4.02% and 0.7% yoy respectively in Aug from 5.42% and 2.56% in Jul. Subsidies for cooking gas and natural gas for vehicles and tax cuts on diesel all helped to keep food prices and transport cost down in Aug.

Together these help to mitigate to a certain extent the increase in transportation cost - the second largest component in the basket – and other components like clothing and tobacco cost.

Despite easing inflation in Aug, the risks still lie on the upside. Higher commodity prices, the government’s massive pump-priming program, the minimum wage program and the discontinuation of diesel subsidies in Sep could result in higher inflation in the latter part of the year.

But we think that inflation would remain manageable as government subsidies and price controls could mitigate some of the impact from higher prices. We have tweaked our inflation forecast and now expect inflation to average around 3.3% in 2012.

With the economy facing headwinds from the weak global environment and benign inflation, pressure is mounting on the central bank to provide the economy with a boost through a rate cut. We however think that a rate cut is unnecessary at this juncture as the economy is still expected to expand by an average 10% in 2H12 and by around 6.0% for the full-year.

Moreover as we have discussed above, risks to inflation is on the upside and cannot be discounted yet. Thus, we think that the central bank is likely to hold its key policy rate steady at 3.00% not only on Wed 5 Sep but for the rest of the year unless domestic growth is threatened by the deterioration in the global environment.