As of August, the 12-month change for a broad measure of consumer prices was 2.9 percent, almost double the change in the year before. However, the bulk of that increase was due directly to the run-up of energy and commodity prices, which tend to bounce around a lot. Measures of the underlying rate of inflation have moved up too, but by less and to levels broadly consistent with price stability. I expect those to subside soon, as well. It is important to remember that a year ago the worry was that deflation – meaning a persistent, widespread decline in prices – might take hold. Deflation tends to inhibit growth because people and companies have a harder time paying down debt and may defer investments and purchases when prices and wages are falling. Avoiding outright deflation is a very good thing. BIS central bankers’ speeches  3  Thus, barring more energy price jumps, I expect inflation to fall late this year and next. Moreover – and this is crucial – households’ inflation expectations remain well anchored. Low and stable inflation expectations help us to deliver low and stable inflation. In light of the current weak outlook, the FOMC has announced that we expect to keep shortterm interest rates exceptionally low at least through mid-2013 and will change the composition of the assets the Fed holds to provide additional support for growth. In addition, we have discussed the range of policy tools available to promote a stronger economic recovery even as we keep inflation pressures in check.

These prerequisites must also be backstopped by strong policy credibility, the second area of priority. 2. Maintaining macroeconomic policy credibility  In its quest to provide public services, the policymakers must avoid being the source of harm. International experience is filled with cautionary tales of how a lack of policy discipline could lead the economy awry. Over-bloated and inefficient government increases risks of unsustainable public finance, and can sow the seeds for political conflicts. Lax monetary discipline is associated with hyperinflation and financial instability. Maintaining macroeconomic policy credibility and discipline must be an integral part of economic reform in Thailand. Policy credence is not an independent choice, but is shaped by the overall institutional setup. Institutions are the set of rules and norms that governs the incentives of economic agents and constrains their behaviours. Political developments, strength of the legal system, property rights enforcement, quality of workforce, degree of corruption are but some aspects of the institutional environment. They all interact with the policymakers’ ability to pursue their objectives credibly. Institutions evolve via a mixture of history, will power and luck. A combination of factors at critical junctures can determine the path of institutional change. Thailand must seek to make the most of the current windows of opportunities, to build on reform momentum, and promote a virtuous circle of institutional development. The ultimate goal is to have a political setup that is in accordance with international standards, with a stronger institutional framework to promote a credible and effective public policy.