Thailand Economic Focus: Steepest price fall since the global financial crisis reflects huge drop in demand

Why are falling prices a concern when everyone likes the idea of good sales? It is because falling prices (i.e., deflation) can exacerbate an economic crisis and turn a recession into a full-blown depression. When prices fall and are expected to drop in the future, households and businesses choose to hold on to money rather than spend or invest. This leads to a drop in demand, which in turn forces businesses to cut production and sell off inventories at even lower prices. Businesses lay off workers and the unemployed have more difficulty finding work. Eventually, they default on debts, causing bankruptcies and credit and liquidity shortages known as a deflationary spiral.

Such impacts for the macroeconomy can be exacerbated by COVID-19. For instance, lockdowns have impacted the demand for goods and services. The fall in global oil prices and slower economic momentum seen from COVID-19 concerns was the key factor behind Thailand’s inflation environment. Indeed, in May 2020, Thailand’s consumer prices fell by 3.4% compared to a year ago, marking the deepest deflation print since July 2009 (-4.4% y/y). Excluding the more volatile prices of energy and raw food components, core inflation was flat in May, after logging 0.4% y/y in the previous month. The recent data shows that Thailand’s consumer prices fell by 1.0% in the first five months of 2020, the slowest inflation pace since 2015 over the same period. For 2020, the Commerce Ministry expects headline inflation to stay in the range of -1.0% to -0.2%.

This fall in prices is across the board. Transport and communication prices dropped 9.2% y/y mostly due to vehicles and vehicle operations while housing and furnishing prices declined 5.6% y/y.  Additionally, food prices fell 0.02% y/y, the first drop since June 2018, after a 1.0% rise in April mainly owing to eggs and dairy products. Other clusters such as textiles, wearing apparels and footwear (+0.1% y/y) and recreation and education (+0.4% y/y) rose marginally.

What are the policies to deal with deflation? Deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending. Since the pickup in severity of COVID-19 pandemic, the Bank of Thailand has implemented three rate cuts of 25 basis points in 2020 to provide some support to economic activity. Currently, the policy rate stands at a record low of 0.5%. Given the impending recession in 2020, May’s deflation print could be a very persuasive reason for the central bank to consider further accommodative measures. By acting more preemptively and more aggressively than usual in cutting rates, the central bank may be able to prevent the Thai economy from slipping into a deflationary spiral.

The views expressed within this publication are solely those of the author and do not necessarily carry the endorsement of the United Nations. Views expressed reflect the author’s judgment as at the date of this publication and are subject to change.