Bank Of Thailand : “inflation can curb purchasing power”

The Bank Of Thailand starts to understand that inflation is a real problem (despites their previous denials), that hits hard poor people. And inflation of costs without inflation of wages… curbs purchasing power… therefore consumption. It’s Economy 101.

“If the government continues to introduce [stimulus] measures and consumer confidence picks up, private consumption can grow without interruption,” said economist Tanawat Ruenbanterng, head of the central bank’s team studying the issue. The measures would help cushion the impact of rising costs through the psychological effect, while the soaring cost of living could worsen fragile private consumption.

The rising cost of living has hit households hard, particularly the 40 per cent with the lowest income.

In the first quarter, political uncertainty, inflation and weak confidence played a crucial role in dampening consumption, particularly for durable goods, which account for 11.2 per cent of private consumption. (Nation)

More, gimme more. The BOT obviously doesn’t really understand the situation. New “stimulus” packages or whatever will… fuel the inflation.

Here we see the fundamental contradiction of the thai authorities : they don’t care about long term. They only want a short term “boost“, that could be profitable on the political level.

Their policy is easy to summarize : Prices do increase ? Let’s give people more money. We’ll see what happen later.

5 Responses to “Bank Of Thailand : “inflation can curb purchasing power””

  1. 1 Naphat 12 May 2008 at 3:27 pm

    The way I read it, the BOT’s main concern is not inflation but how inflation would put a break on growth. From their latest Inflation Report, their view is that “[inflationary] pressures were likely to moderate in the latter part of the year in tandem with the slowdown of the global economy.”

    They are macro guys, looking at the ‘big picture’ I guess. The government’s response would be to provide support for the people most effected by rising food prices.

  2. 2 thaicrisis 12 May 2008 at 3:55 pm

    -> Naphat. I don’t agree with your analysis.

    -First, I have demonstrated that “inflationary pressures” can’t, I insist, can’t ease in the second half of the year (base effect + real inflation costs + delayed inflation [prices controls won’t last long] + secondary effects [upward pressures on wages] + stupid policy to boost GDP with the famous stimulus packages [that will also fuel inflation]

    The idea that a slowdown will reduce automatically the costs inflation we have currently is utterly stupid. It was true before, not now. The world has changed.
    Energy, food, basic commodities… are still needed during a slowdown.

    What we could loose thanks to an economic slowdown would be basically compensed by a global increase of the population, and an increasing developpment in many countries.

    Their report is nothing but crap. And even the thai gvt has revised its inflation forecast from 3/3,5 to 5 % for 2008.

    -Second, they do really fear inflation. Because inflation of costs, especially on commodities, affect really hard poor people and people with low wages (vast majority in Thailand).

    From a macro point of view, a decrease of prices on LCD TVs is irrelevant compare to an increase of price of rice for instance.

    There is a high political risk with inflation in developping countries (look at the “riots of hunger”, the riots because of gasoline prices in Burma etc.). You would agree that those political risks are far less in western countries.

    -Third : it doesn’t make sense to say that inflation is not part of the “big picture” ! Inflation is definitely a “macro economy” event.

  3. 3 Naphat 12 May 2008 at 4:35 pm

    I’m not saying inflation is not part of the big picture. The BOT, like all central banks, have to weight the risks of rising prices vs the risks of the economy significantly slowing down and going into recession. At both sides of the spectrum, there’s real economic pain to people on the street. Their opinion now, seems to be that the oncoming global slowdown puts growth more at risk and they would rather keep interest rate the same. I’m no economist and I don’t know if the BOT’s view is correct: I’m just trying to give some context to the Nation’s report and your post.

    Let’s be constructive here: I’m not sure what your alternative policy would be. One is for to for the BOT to raise interest rates. But it seems they do not want to do this and risk a significant slow down if the rate increase is compounded with a global slowdown.

  4. 4 thaicrisis 12 May 2008 at 6:42 pm

    I don’t believe we can compare the BOT with… the BCE for instance.
    Or the BOJ (deflation since… 15 years), or the chinese central bank (all for the growth, because of the political risks of unemployment), or a central bank in a country like Saudi Arabia (with their official peg to the USD), etc.

    Central banks around the world seem to have the same issues to deal with… But in reality, some situations are very different.

    The BOT likes to play like the FED. It’s good for their ego, but its theatrical.

    For instance, I’m not sure the BOT has to choose between growth and inflation
    With a forecast of +5 % for GPD growth in 2008, where are the risks ?

    (My question is a bit rethorical… because indeed we have some risks).

    Furthermore, can we compare the real estate situation in the US (with prices decreases since mid 2005) and their amazing debt bubble, with the situation in Thailand ? Of course not.

    On the other hand, inflation is -apparently- higher and much more dangerous (from a political point of view) in Thailand than in the US (where some huge deflationary forces are working).

    My point : the BOT should try to think out of the box, instead of repeating like a headless chicken the speechs of Greenspan… 😉

    Now, your point : what could be such alternative policy ?

    That’s the tricky question.

    I think Thailand could have, afford, a lower growth. Thailand is not China (with millions of poor chaps from upcountry coming every year into the cities to find work).

    But Thailand can’t leave inflation running up. Because, we have no security cushion : inflation hits hard poor and low income people.

    The problem is : for short term political reasons, the government has only one obsession (plus to amend the constitution…) : “BOOST THE ECONOMY”. It’s their official goal.

    Because they know that new elections will be organized soon… they need a “boost” of the GPD.

    They are going to sacrify a lot only to be able to show a nice growth %.

    It’s very, very dangerous. And childish.

    They should stop this insane run, increase interest rates, reduce the subsidies policies (a real cancer in Asia), launch real reforms (especially a tax reform), etc. The possibilities are endless.

    But they won’t. Too hard. Easier to “boost”, and to wait to be reelected.

  5. 5 fall 13 May 2008 at 11:12 am

    Start lower growth and *poof* there goes your next government term. And the BOT got link to politic too much.

    Policy to controlling and cutting excess fat is good in long-term, but a suicidal political move in short-term. Even if they manage to do it, the next government will surely increase growth to boost their standing. So all effect would be in vain. It’s a 2 prisoner game-theory kind of thing.

    The only way to alleviate the problem AND get re-elected is to throw in more money. Even if it mean a certain road to hell.

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Thailand Crisis

Coup, Economic slowdown, Terror In the South... The situation is worsening in Thailand. Bumpy road like often before.

But this time, it's different.

The key to understand the present turmoil is the inevitable... succession of King Bhumibol.

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