Mon, Oct 08, 2007 page8

• Editorial: Watching for inflation as CPI rises

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  Taiwan is enjoying steady economic growth on the back of stable exports, but simultaneously the country is facing a higher consumer price index (CPI) caused by rising costs for vegetables, meat and other food.

  There also exists an inflation risk resulting from rising costs of imported fuel and commodities here and in most economies across Asia, including China, India, Singapore and the Philippines.

  Last week, the government statistics bureau reported that the nation's CPI rose 3.08 percent last month year-on-year. That increase was the highest since October 2005, raising concerns of accelerated price pressure.

  On a positive note, the CPI only rose 0.90 percent for the first nine months of this year and the index is likely to stay under 2 percent for the whole year, the statistics bureau's forecast said. The public, however, does have reason for concern as almost every daily necessity has become more expensive.

  The government's monthly shopping list provides a useful example. Of the 389 items the statistics bureau officials shopped for last month for price inspection, 248 items saw rising prices, 114 items posted falling prices and 27 items were unchanged.

  Consumers focus on the results of the CPI statistics because inflation can undercut their purchases. This is particularly true when stagnating wages erode purchasing power.

  But what is worth noticing for financial markets and households is the stronger-than-expected rise in core CPI statistics, which grew 1.94 percent last month from a year earlier, the largest annual increase since March 2002.

  This figure -- the CPI excluding more volatile components such as the prices of fruit, vegetables, fishery products and energy -- is a major gauge of inflation risk that portends trends in consumer prices and changes in the central bank's monetary policy.

  The continued increase in core CPI after expanding a revised 1.60 percent in August and 1.13 percent in July suggests that inflation risk is building and that price pressure is now expanding to non-volatile consumer goods.

  This situation certainly increases the odds of another interest rate hike by the central bank at its next board meeting in December. A higher interest rate would mean less valuable government bonds for investors, rising borrowing costs for businesses and more interest income for depositors.

  The latest government statistics showed signs that cost-push inflation is emerging in this country because of rising energy and raw material costs. It is not demand-push inflation, in which too much money is available for too few goods.

  But whether it becomes fully developed cost-push inflation remains to be seen, as other factors must be taken into account. These include whether the aggregate supply of goods and services is decreasing on continually rising production costs; whether manufacturers are running at full production capacity and cannot expand further while passing on extra costs to consumers; and whether consumer purchasing power remains weak.

  While the government has attempted to rein in inflation by pushing up the value of the NT dollar and adopting a new fuel pricing mechanism, it should also pay close attention to whether suppliers, distributors, wholesalers and retailers of goods and services are exploiting consumers by hoarding goods and raising prices, especially during the post-typhoon period.
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