But despite the rise, analysts and officials said they still believed inflation was unlikely to be a big threat to the slowing Thai economy because sluggish demand would help cap 1998 inflation at around 10 per cent.

The government has projected that the Thai economy will contract by 4.0-5.5 per cent in calendar 1998 against an earlier estimate of 3.0-3.5 per cent, and an actual 0.4 per cent contraction in 1997.

The May consumer price index rose 10.2 per cent year-on-year to 128.1 compared with an increase of 10.1 per cent in April and a rise of 4.3 per cent in May a year ago.

The inflation rate averaged 9.5 per cent during the first five months of this year, the ministry said.

Deputy premier Supachai Panitchpakdi told reporters that he expected inflation for the whole year to run at around10 per cent or lower based on data released in recent months.

"Slowing economic growth that will be sustained for the rest of the year should give us a whole year inflation of around 10 per cent or lower," he said. "Because of this encouraging trend, the government feels that there is room to look into ways of stimulating the economy," he added. Supachai, who is also commerce minister, said that rises in the price of food and transportation were the key items that needed to be monitored. Food prices in May were up 0.8 per cent from April and 13.1 per cent from the same period last year, led by surging prices of fruits and vegetables, meat, eggs and dairy products.

"This was caused by seasonal factors as the production of fruits and vegetables dropped during summer months," said a commerce ministry official.

"Eggs and meat supplies slid due to a heat wave which reduced the chicken population, especially layer chickens. A liquidity crunch also put some pig and chicken farm operators out of business andconsequently squeezed supplies," she said.

Even though the prices of rice and flour contracted 1.2 per cent in May from the previous month due to rising availability of supplies, the year-on-year rise was as high as 37.9 per cent.

The price of non-food items rose 0.5 per cent from April and 8.6 per cent year-on-year. Alcoholic drinks and tobacco prices surged 1.2 per cent month-on-month due to higher production costs.

Transportation and communications prices rose 0.7 per cent from a month earlier, fuelled by rising oil prices.

Khanchit Assavasamran, an economist at Vickers Ballas, said he expected inflation to peak in June and agreed with minister Supachai's projection that inflation for all of 1998 would not exceed 10 per cent. "I see domestic demand shrinking further and that will put a lid on consumer prices. Even though May wholesale prices index rose sharply, it will be difficult to pass on all that cost to consumers," he said. Wholesale prices rose 19.1 per cent year-on-year in May against an18.2 per cent rise last month.

"The CPI should peak in June and start easing. After July, I don't think we will see double digit inflation," Khanchit said. "Besides sluggish demand, food prices are likely to ease as more supplies become available due to the seasonal factors," he said.