For the past few months, consumer prices in the country have stayed relatively low, so much so that officials at the Directorate General of Budget, Accounting and Statistics (DGBAS) said there is no immediate risk of inflation.
Taiwanese might therefore think that last month's 0.67 percent year-on-year increase in the consumer price index (CPI) and a rise of 0.90 percent for the first four months from a year earlier would mean the economy would be in good shape for the rest of the year.
Not so. A closer look at last month's report on price indices released by the DGBAS last Friday tells a different story.
The latest statistics showed that the CPI growth rate has declined from 1.74 percent in February to 0.84 percent in March and to 0.67 percent last month, while that of the wholesale price index (WPI), which measures production costs, has risen from 6.75 percent in February to 7.50 percent in March and to 7.83 percent last month.
What do these numbers tell us? First, the statistics showed the WPI has continued outstripping the CPI numbers by a wide margin, indicating that price pressures have been building up for manufacturers.
Second, this divergence between the CPI and WPI growth trends shows that seemingly tamed inflation may be temporary, because manufacturers who tried to absorb the extra costs themselves in the past because of fierce market competition could begin to pass the increased burden on to consumers sometime in the near future, if they have no other way of coping with rising costs in fuel and raw materials.
A lower CPI could also indicate that consumer spending remains weak in this country, as rising fuel prices and stagnating wages have apparently eroded people's buying power. This means that consumer spending, which accounts for nearly a third of the nation's economy, may not be able to play as major a role as a driver of economic growth as the government had expected.
More importantly, the report on WPI change last month also raised eyebrows because it showed the import price index rose 10.41 percent from the same period last year, the highest level since last September.
The DGBAS attributed the 10.41 percent increase mainly to surging prices of metal products and chemical materials. But no one can deny the contribution to higher import prices that a 2.53 percent year-on-year decline in the New Taiwan dollar versus the US dollar exchange rate has had.
The NT dollar has slipped 2.1 percent against its US counterpart so far this year as the central bank maintains one of the lowest interest rates in Asia outside of Japan, which in turn keeps the NT dollar relatively weak compared to other regional currencies, helping boost the nation's exports.
The central bank might hope that as long as inflation is under control, its effort to fine-tune its monetary policy through gradual rate hikes will help sustain growth. But the result is that it has caused price pressures to build up on imported goods while forcing more investors to take funds out of the country and purchase higher yielding assets abroad, causing the NT dollar to depreciate further.
Lawmakers agreed last week to raise the cap on how much insurers can invest overseas, which while helping dispose of surplus capital in the market will certainly have a negative impact on the NT dollar if monetary policy remains unchanged.
While the divergence between the CPI and WPI, as well as concerns over the NT dollar's depreciation, suggest the central bank will continue raising rates next month, the government also needs to act to improve the economic fundamentals.
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