The cost is extremely high in every way, how much does the manufacturer pass through cost to us?

ACU PAY Thailand Channel
September 5, 2022
2:28 pm
Post Views: 423

This year, producers face high costs all the way from world oil and commodities It is expensive, especially after the Russo-Ukrainian war even further exacerbated the cost of logistics that came with the disruption of the global production chain since last year.

This global situation has made Thailand’s producer inflation grow. For several months in a row, it was 13.3% in June (compared to a growth of 7.1% last year). In terms of consumer inflation in Thailand, although it has accelerated more slowly. But it is moving closer and closer to 7.66%. As soon as the government gradually reduced the measures to fixed the price of energy, oil, gas, and electricity since June because they couldn’t bear the burden of tens of billions of baht per month. After assessing that the conflict situation between the two sides in the world would not be easy to end, economic sanctions against Russia by the United States, the European Union, and some Asian countries will continue. resulting in pressure on world commodity prices for a long time.

Producer price inflation and consumer price inflation have moved along and signaled for several months.

Producer inflation and consumer inflation in Thailand have a correlation coefficient of nearly 90%. Thai producer inflation has a four-month pre-inflation qualification, but at some point, the lead qualification may be shorter or longer depending on special events. such as during a crisis.

The Producer Price Index (PPI) reflects the price of all domestic produce. It is the price at which local manufacturers sell products at the production site, in front of the factory, or in front of the farmland. The Consumer Price Index (CPI) reflects the final price of goods and services that consumers spend. The consumer inflation basket consists of locally produced goods, imported goods as well as services such as utilities, fares, medical expenses, education costs, cell phone/internet charges, housing rent, service charges, and wages.

Since the coverage of these two price indices is different, the Producer Price Index and the Consumer Price Index do not completely move together. About a third of Thailand’s inflation basket is comprised of daily expenses, and about 16% of imported goods are included in the inflation basket. Another difference is that the Producer Price Index reflects the cost of domestic and imported raw materials and intermediate goods used in the production process. including the cost of production factors other than raw materials, such as labor, capital, operations, and land, but does not include transportation and taxes. while the consumer price index is influenced by passing through the total cost of the producers. which includes shipping and intermediary fees. wholesale and retail from the factory to the consumer. Taxes collected from producers (such as excise tax) and VAT collected from consumers.

During the inflation crisis, producers passed through the cost to consumer inflation less than usual.

The Producer Price Index and the Thai Consumer Price Index tend to diverge during economic crises (image 1), reflecting the unusual mechanism of cost transmission from producer prices to consumer prices during weak purchasing power. Especially if it is during the high cost of oil and global commodities. Or an outbreak of animal disease causes a shortage of products. The government has to impose strict measures to control the prices of certain essential goods to help reduce the impact on the cost of living. The producers have to adjust to the high-cost management in every possible way, such as purchasing a large lot of raw materials. Reduce production waste, promotions, packaging quantity/size, new product release, and wholesale discounts.

During the COVID crisis, many product segments have passed through the high costs that have been holding back since the beginning of this year (image 2), such as ready meals, meat, beverages, and dairy products, and medicine and medical supplies, because the government was not very strict and people still needed to buy them. even if things get more expensive However, there are a number of commodities that do not pass much cost, such as petroleum products, agricultural products, seafood, fruits and vegetables, building materials, and vehicles, because they are price-controlled products. Is it a product that people would buy less of if the price increased? The cost transmission capability of each product group reflects government subsidies and controls on retail prices, market structure, and competition among different industries.

World oil prices have not fully reflected domestic oil prices. because the government has helped to stop it.

The high world oil prices have not fully reflected the domestic oil prices. because governments around the world are reducing the effect. Especially since the beginning of this year (image 3), even the main industrialized economies have flexibly released the transmission mechanism from world prices to domestic prices relatively. Instead, it was found that since the beginning of this year, the government has helped to support the domestic oil price more than before. For developing countries Allowing high world oil prices to be passed on to lower domestic oil prices than developed countries but delaying it like this won’t last long. because government finances around the world have already decreased a lot. Therefore, we may see a tendency to gradually pass more expensive energy costs onto domestic retail oil prices. just like what is happening in Thailand right now.

The impact on global energy prices is consistent with studies that show that if global commodities prices are high, transmission along the domestic price chains of different countries will see some transmission (partial), whether it is the main industrial economies or developing countries. The impact on the producer’s price will be greater than the impact on the consumer price. Another interesting finding is that the transmission of high global commodity prices to producer prices is evident in both major industrial economies and developing economies. But the effect on consumer prices is evident only in the major industrial economies. which reflects the fact that governments in developing countries typically have measures in place to help slow down consumer prices in their country in order to avoid being affected by more volatile global commodity prices.

Finally, global costs are being passed on to domestic prices. It’s happening all over the world. It may happen slowly or quickly, more or less, depending on the government’s ability to temporarily block it and the producer’s ability to bear the cost. to wait for the moment to pass the cost to the buyer’s price. Tracking the direction of producer inflation and consumer inflation, as well as understanding the mechanism of cost transmission from producer to consumer by product category, with different market structure behaviors, It will help signal to all parties to prepare to adjust to mitigate the impact that may spread early.

Author:
Dr. Thitima Chucherd
Monetary Policy Department
Column “Bang Khun Phrom Chuankid,” Thairath Newspaper
The issue date is June 18, 2022.
This article is a personal opinion. which does not necessarily correspond to the opinions of the Bank of Thailand.