Bangkok--6 Jul--HSBC
Headline CPI inflation in June came in slightly lower than our forecast, but still marked the first increase in several months, as the effect of lower energy prices started to wane. Core inflation was unchanged at 0.9%. Although inflation remains in negative territory, the CPI rose on a m-o-m basis in the past three months, underscoring the view that Thailand is merely undergoing a "technical deflation". We forecast headline inflation to return to positive territory in 4Q 15, but this is still not a factor to deter the Bank of Thailand (BoT) from delivering another 25bp policy rate cut to support economic recovery. We expect headline inflation to remain low next year as well, averaging just 2.3%.
Facts
- June y-o-y headline CPI was at -1.1% (HSBC: -1.0%, Bbg: -1.0%, Prior: -1.3%). Based on our calculations, CPI rose 0.1% m-o-m on a seasonal-adjusted basis (Prior: 0.0%).
- June y-o-y core CPI was at 0.9%, unchanged from the previous month but slightly below our expectation of 1.0%. On a seasonal-adjusted basis, core CPI rose 0.1% m-o-m (Prior: 0.0%). This measure excludes fresh food and energy items which account for 27% of the CPI basket.
- In 2Q 2015, the y-o-y headline CPI declined to -1.1% from -0.5% in 1Q. The y-o-y core CPI also declined to 1.0% from 1.5% in the same period.
Implications
Headline CPI inflation (y-o-y) came in slightly lower than our expectation but still marked the first increase in several months, as the effect of lower energy prices started to wane (Chart 2). Core inflation had declined earlier this year but was unchanged at 0.9% in June. Although headline inflation remains in negative territory, the CPI rose on a m-o-m basis in the past three months, underscoring the view that Thailand is merely undergoing a "technical deflation". We forecast headline inflation to return to positive territory in 4Q 15.
We explain the change in June CPI using the three components as follows:
- The core CPI continued to see sustained but gradual m-o-m increases during the past three months. This reflects the slow recovery of domestic demand but does not show a deflationary trend. The components which are not directly linked to energy and food prices continued to rise, although at a very gradual pace, namely 1) clothing and footwear, 2) health and personal care, and 3) recreation & education (Table 1). - The drag on y-o-y CPI from energy prices remains substantial (-1.6ppt) but slightly less than in April and May. Despite the downward adjustment of unit electricity charges for May-August period, retail oil prices in the transportation sector (gasoline and diesel) had more or less stabilized in line with global oil prices (Chart 3).
- Fresh food component subtracted less than 0.0ppt from the y-o-y headline inflation in June vs. -0.1ppt in May due to the unusually large base effect in May 2014 which was related to warmer weather and lower food supply. On the m-o-m basis, however, the fresh food component actually rose 0.1% in June, due to the negative effects of summer weather on the supply of vegetables.
Headline inflation is expected to gradually rise in 3Q and 4Q, but this is still not a factor to deter the BoT from lowering the policy rate further to support the economic recovery which remains tepid (see
Thailand's May activity data, 30 June 2015). We forecast headline inflation to remain below long-term trend for some time, averaging -0.4% in 2015 and 2.3% in 2016. This should give the central bank ample time to boost economic activity before it starts to worry about inflation. We expect another 25bp rate cut from the BoT, possibly as soon as 3Q 15.