INFLATION has been in the spotlight since the onset of the global economic recovery. This is especially the case in many emerging economies, including Thailand, which have witnessed strong economic rebound. As recovery gains traction, higher spending by consumers and businesses will put upward pressure on inflation. Meanwhile, greater pressure on resources as well as higher commodity prices will eventually lead businesses to pass on higher production costs to consumers.
As reflected in the minutes of the Monetary Policy Committee (MPC) released for the first time on January 26, 2011, rising oil and commodity prices, the return of the Thai economy to its long-term growth trend and pent-up pressure from delayed price adjustments would contribute to inflationary risk going forward.
Consumers, businesses and authorities alike are all concerned about high inflation. This is because inflation decreases the value of money and thus its purchasing power; hampering the ability of consumers and businesses to plan their consumption, production and investment ahead. And during a period of expected continued recovery and amidst other external risks, everybody wants a smooth transition. For this reason, many Asian economies have already set foot on the path to curb inflation in order to contain risks in growth in the period ahead.
One approach in addressing inflationary risk arising from temporary shocks is through price administration measures. This helps calm the market and alleviate the burden on consumers in the short term. However, if factors driving inflationary pressure persist, price administration will not motivate consumers to adjust and eventually producers will no longer be able to bear the costs. As a result, if left to work against market forces, price administration may lead to problems such as shortages, hoarding and black market trading. At the end, consumers may end up paying more than they need to. On the other hand, when inflationary pressure is broad-based and persistent, we need to rely on tools that can influence spending behaviour on the aggregate to achieve "price stability", meaning "low and stable inflation", to support long-term growth. The key instrument that central banks rely on to achieve both goals is interest rate adjustment, which affect both spending and investment decisions. Moreover, the central bank's commitment to fight inflation can also affect expectations about stability of future inflation, helping to smooth spending decisions and price adjustments.
In addition, through anchoring inflation expectation, monetary policy normalisation, that is an interest rate increase, can also reduce the risk of economic and financial imbalances. Although this causes an increase in businesses' cost of funding, normalisation actually signals to businesses not to be overconfident on demand.
This helps to soften the price pass-through, slowing down the inflationary pressure.
Last but not least, it is worth mentioning here that even though price stability is the primary objective of the Bank of Thailand, it actually goes hand-in-hand with sustained economic growth. The process of monetary policy deliberation is comprehensive and forward-looking and calls for long-term consideration of not only inflation but also growth prospects, the external environment, financial market developments as well as financial imbalances, to name but a few. Therefore, the fact that the current policy cycle is rather gradual, in my opinion, reflects the intention of the Bank of Thailand to facilitate the economy in rebalancing towards a sustainable path.
The opinions expressed in this article are the author’s own and do not necessarily reflect the official opinion of the Bank of Thailand.