What is inflation?
Inflation is the measurement of a change in the price of goods (such as foods and clothes) and services (such as rental and medical expenses) over time.
In general, inflation can be calculated by comparing the current price of products and services to the previous year's price. The inflation rate refers to the average increase in the price of goods and services.
Assuming the inflation rate remains at 3%, this indicates that average price this year is 3% higher than last year. For instance, if a bag of rice costs 100 baht last year and 103 baht this year, the price has risen by 3%.
How does one measure inflation?
Every month, the Ministry of Commerce gathers the prices of 430 different goods and services to construct the consumer price index (CPI). The Bank of Thailand uses headline inflation, or a rise in the consumer price index over the preceding year, as the inflation target.
The government and the Bank of Thailand set the inflation target range of 1-3 percent
The minister of finance and the monetary policy committee (MPC) agree to set an inflation target range of 1-3 percent, which is approved by the cabinet, to keep inflation at an appropriate level and not too volatile.
A clear inflation target would aid businesses and consumers in planning future investments and expenditures. When inflation becomes too high or fluctuating, businesses struggle to set prices for goods and services, while consumers struggle to budget their spending. In contrast, when inflation is exceptionally low or negative, consumers put off their spending because they anticipate prices to decline in the future. While consumers benefit from a lower price, businesses may be forced to close, and many people may lose their jobs if everyone delays their purchases.
What does the Bank of Thailand do when inflation exceeds the target?
When the headline inflation surpasses the target of 1-3 percent, the Bank of Thailand is required to explain the situation to the government and the public via an open letter.
A mutual agreement between the monetary policy committee and the minister of finance specifies the following condition. The MPC must write an open letter to the minister of finance if either average headline inflation from the previous 12 months or forecasted average headline inflation for the next 12 months exceeds the target range. This open letter needs to explain why inflation has surpassed the target range and propose a plan to return inflation to the target range, along with the expected time frame.
The monetary policy committee must issue an open letter every six months until both above-mentioned inflation rates return to the target range.
In addition, all open letters to the minister of finance were made public.