BoT, govt may have wrong inflation data

At the time of writing (Tuesday), the Bank of Thailand’s Monetary Policy Committee (MPC) had not met to decide on the policy interest rate which is currently set at 2.50%. The panel was scheduled to meet yesterday and the committee was under pressure to lower the rate by 25 basis points. The pressure arises from many months of low inflation rates and the recent strong Thai baht. Several central banks in the region have cut their policy interest rates for those two reasons. The latest one is the Bank of Korea.
The Bank of Korea cut the rate from 3.50% to 3.25% after holding the rate stable for more than three years. The decision was made right after the inflation rate dropped to 1.6% and the recent strengthening of the Korean Won.
Until last Friday, I believed that the BoT would cut the rate by 25 basis point, mainly to relieve pressure from the baht which has stayed strong below 33 baht per dollar for almost two weeks. The Thai baht was as weak as 37 baht per dollar in late April. An exchange rate beyond 35 baht per dollar would be much appreciated by exporters.
I was convinced that the BoT would welcome a weaker currency and trimming the policy rate would be the decision. But after seeing the latest data release on foreign reserves, I have changed my view.
The BoT probably see that 33 baht something to the dollar is the right value for the currency at present. During the first week of October, (speculative) capital flew out due to dollar appreciation. The BoT could have let the money flow out freely without intervention and allow the baht to soften beyond 34 baht per dollar. Instead, it sold US$2.4 billion (79.9 billion baht) from its reserves to keep the Thai baht moving in line with the appreciating dollar.
Because of this unexpected market intervention, I suddenly realised that there is no chance that the BoT would cut policy rate to help the baht. The BoT has to look at another reason to cut the policy rate. The answer would be inflation.
The Bank of Korea took the opportunity to cut the policy rate when inflation dropped below its 2.0 % target rate in September. Bank of Korea has been under pressure to help the economy no less than the BoT, particularly after recent Q on Q GDP growth showed a 0.2% contraction.
Thailand’s current inflation target range is 1% to 3%. Consumer price inflation rates have been well below 1.0% for over 12 months, except for May. The BoT does not seem to be concerned about inflation rates being too low and I believed that the MPC would have similar reaction at the meeting yesterday.
Why? The reason is that official inflation rates do not reflect the actual price situation. The culprit is the heavily subsidised energy prices. To artificially keeping energy prices down, Thai government uses the Oil Fuel Fund and Electricity Generating Authority of Thailand as vehicles. At present, the government owes these two agencies 200 billion baht. If such subsidies stop, energy prices — petrol pump prices and electricity rates — could jump more than 10%, causing inflation to increase by at least 1%.
In the BoT’s view, the inflation risk is too high as the real cost of energy is yet to be realised. With 200 billion baht of government subsidies on energy costs, there is a good chance that the government would soon lose its ability to keep energy prices artificially low.
I am sure that with hidden inflationary pressure, it would be a waste of time for the government to persuade the BoT to raise the inflation target range from 1.5% to 3.5%, hoping that the BoT would feel guilty. In the eyes of the BoT, the real inflation rate is likely to already be beyond 2.0%. In fact, according to the BoT’s own data collection, the actual inflation rate might be close to 4.8%, not well below 1.0% as complied by the Ministry of Commerce (MOC).
The BoT collects data on seven essential products namely; gasohol fuel, vegetable oil, eggs, diesel fuel, cooking gas, chicken meat, and pork meat over the course of five years. The average annual price increase for those products is 4.79%. No wonder Thai consumers persistently complain that today’s cost of living is high. If the MOC’s inflation rate is an accurate representation of the price pressure, Thai consumers should not be complaining as the average MOC inflation rate is only 0.27% per annum.
Which data is real and should be used as the benchmark for interest rate setting? The BoT collected data or MOC data?
My answer is neither. Real inflation could be far higher than both the BoT’s and MOC estimates. My argument is that the Consumer Price Index is fundamentally flawed as it does not reflect rising debt payments.
When one rents a house, a change in rental cost would count as a part of the consumer price index. However, few consumers reside in rental properties and rents are infrequently adjusted. But if one buys a house (with cash or with a loan), rising costs of the house would not count in the consumer price basket as houses are not regularly consumable items like gasoline and pork. Monthly mortgage payments are not considered a consumption expense.
From 2018-2024, house prices in Thailand rose on average 9.1% a year. If the rising prices of houses is included in the CPI, surely one would not see inflation rates below 1.0%. This concept of hidden debt payment expenses applies to all items purchased with credit. Debt payments are important parts of our expenses, but not technically counted as consumption expenses. With the fact that Thai household debt is over 90% of GDP, the consumer inflation rate could grossly underestimate the true cost of living.
The concept of a Consumer Price Index was invented more than 100 years ago in 1913. At that time, household debt was not common. Most items were purchased with cash. Therefore, the CPI was the appropriate representation of the cost of living.
The world has changed drastically and a more accurate measurement of the cost of living must be found. Any economist who can invent a more accurate measurement of inflation would surely be a candidate for the Nobel Prize in Economics.
Because of the CPI deficiency, all central banks make a mistake by monitoring wrong cost of living indicators, including the US Federal Reserve Board. The Fed lowered interest by 50 basis point, citing a consistently falling CPI. Meanwhile, US consumers complain about the unbearably high cost of living. My American friend called it the “hidden inflation” phenomenon — official numbers are low but prices paid by consumers are high.
This is not a joke, but a true story. A Thai restaurant in Long Beach, California posted signs in the restaurant saying: “Because of high inflation, the restaurant is no longer putting prices on the menu. Please ask a waiter for current prices”.
I chuckled because I saw a similar post in an Argentinian restaurant when inflation was over 20,000% a year. Prices changed so fast, no one bothered to print current prices.
The verdict? No policy rate change from the MPC yet. Let’s see whether the BoT will succumb to political pressure or be truthful to its mission.
***Bank of Thailand yesterday cut the one-day repurchase rate by 25 basis points to 2.25%.