There has been a steady increase in the inflation rate since October 2010, with the most recent data showing that prices rose by 8% year on year in March. Much of the rise has been driven by an increase in food prices, which is normal at this time of year, especially following the weak vuli rains. However, there are signs that the longer main rains could also be weak this year and that inflationary pressures are becoming more generalised, with rising oil prices also starting to have an impact. Furthermore, the economy faces ongoing structural rigidities against a background of robust growth and the overhang of loose fiscal and monetary policy from 2009-10; we therefore think that it will be a major challenge for the BoT to meet its 5% target for June 2011 and that inflation will remain elevated in 2011. As a result of these factors we expect inflation to average around 7.7% in 2011, although from this higher base, and assuming a reasonable harvest in 2012, it should ease back moderately next year, to around 6.5%.