Return of inflation creates winners and losers
Published in EIC Outlook Q1/2017 Click here for more detail
Headline inflation is expected to accelerate to 2.3% YOY in 2017 due mainly to higher oil prices. Global oil prices are expected to rise, as the average price for Brent crude reaches USD 54 per barrel in 2017. Headline inflation should increase in Thailand after having remained low throughout the global oil price slump that began in 2015. Inflation’s return will help some sectors of the economy and hurt others.
Higher inflation increases the burden on producers and consumers. Cost-pushed inflation—a supply-side consequence of higher fuel prices—raises the cost of transportation and other factors of production. This results in higher overall production costs, which eat into profits. At the same time, consumers must now pay higher prices for goods and services, especially those that have a large proportion of fuel in their production costs. Moreover, higher inflation will not benefit salary earners whose income is fixed. Their purchasing power will not rise when prices of goods and services go up.
However, some exporters should benefit from rising inflation, namely companies that sell oil, commodities and oil-related products (such as rubber, chemicals and vehicles). Prices of these products should increase on the back of higher oil prices and subsequently increase their producers’ revenues.
Inflation’s net impact on overall exports must be assessed by looking at trading partners’ inflation and exchange rates in comparison to Thailand’s inflation. Thai inflation lagged that of many countries in the region in 2016 (Figure 8), reflecting the increase of prices is led Thai inflation lagged that of many countries in the region in 2016, reflecting that prices of Thai goods are rising slower than its competitors. Thailand will therefore gain benefit from price competitiveness. However, the real effective exchange rate (REER)—a country’s currency relative to a basket of its trading partners’ and competitors’ currencies, with adjustments for inflation—reflects the real price competitiveness of each country. In fact, the REERs of other currencies in the region have depreciated more than the REER of the Thai baht (Figure 9). This has given them an edge in price competitiveness. In 2016, the Thai baht’s REER weakened by only 0.6% compared to the end of the preceding year. Moreover, the bilateral exchange rate of the baht vis-à-vis the dollar appreciated by more than that of currencies of Thailand’s competitors. Despite low inflation, Thailand might lose competitiveness to other exporting countries because exchange rate volatility appears likely during the coming year and beyond.
