Thailand’s Recent Negative Inflation: Assessing the Risk of Deflation
Thailand has experienced negative inflation for the past eight months, registering a rate of -0.49% recently. This has prompted questions about whether the country is entering a period of deflation. While a negative inflation rate is a key characteristic of deflation,it doesn’t automatically signify its presence.
According to the European Central Bank (ECB), a true state of “outright deflation” requires more than just temporarily negative inflation. The ECB identifies four key criteria:
- Prolonged Negative Inflation: A sustained period of negative annual inflation.
- Broad Price Declines: Falling prices across a wide range of goods and services, not isolated instances.
- Shifted Inflation Expectations: Long-term inflation expectations falling below the target range.
- Weak Economic Growth: Low or continuously shrinking economic growth.
The United States during the Great Depression provides a historical example of full deflation. Between 1929 and 1933,the US experienced consistently negative inflation: 1929 (0.0%), 1930 (-2.7%), 1931 (-8.9%), 1932 (-10.3%), and 1933 (-5.2%). Concurrently, the US experienced important economic contraction, with Real GDP declining from 2.3% in 1929 to -12.9% in 1932.
Initially,some observers during the early stages of the 1929 crisis believed falling prices were temporary,encouraging spending. however, as negative inflation persisted, expectations shifted. Consumers began anticipating further price declines and delayed purchases, while producers postponed production and investment, anticipating reduced demand. This created a “Deflationary Spiral” – a cycle of delayed spending, reduced production, and stagnant incomes – wich contributed to a prolonged economic recession lasting until 1933. The core issue is that consumption and investment, vital drivers of economic growth, are suppressed in a deflationary surroundings.
Currently, the Bank of Thailand (BoT) targets an inflation range of 1-3%. Five-year inflation forecasts for Thailand remain within this target. Based on the ECB’s criteria,the thai economy has not yet met the full definition of deflation,as not all conditions are currently present.
However, the continuation of negative inflation numbers does pose a risk of Thailand falling into a deflationary cycle, particularly given that economic growth is currently below its potential. Therefore, close monitoring of the situation by relevant agencies is crucial, along with proactive policy measures to prevent the emergence of a damaging deflationary spiral and safeguard the Thai economy.
References:
- Bank of thailand (BoT)
- Office of Trade Policy and Strategy (Office of Trade Policy and Strategy)
- German Bundesbank
- European Central Bank (ECB)
- federal Reserve Bank of Minneapolis
- Investopedia
- KOF Swiss Economic Institute
- Statesman
- The George Washington University, (gabriel Mathy and Herman O. Stekler)
- Trading Economics
- The Standard Wealth
- The Swiss Journal of Economics and Statistics, (Jean-Marc Natal)
