EDITORIAL: Taking inflation by the horns

The inflation report released last week by the government showed that consumer prices rose 3.89 percent last month from a year ago, following an increase of 2.96 percent in January. The report was a clear message that rising commodity prices will remain a concern after the presidential election.

Consumer prices started climbing in the second half of last year as the rising prices of oil, commodities and raw materials -- as well as damage left by typhoons -- began to take their toll. The average consumer price index (CPI) showed an increase of 2.97 percent in the July to December period over the same period in 2006. For the whole year, the average CPI rose 1.80 percent year-on-year, while the core CPI -- which excludes volatile vegetable, aquatic product and energy prices -- rose 1.35 percent. That was the highest growth in 11 years.

In the first two months of the year, the average CPI rose 3.42 percent year-on-year, while the core CPI increased 2.68 percent, the Directorate-General of Budget, Accounting and Statistics (DGBAS) said last week.

The impact of inflationary pressure driven by import costs is inescapable for Taiwan, as the economy is heavily dependent on imported industrial and agricultural raw materials. The central bank has cited high import costs as the key factor behind the 3.42 percent average increase in consumer prices during the first two months of the year, accounting for 79 percent of the rise in prices.

In response to soaring oil and commodity prices, the government has offered several measures to alleviate price pressure, but the effectiveness of these measures remains to be seen.

Last week, the legislature passed an amendment to the Value-added and Non-value-added Business Tax Act (加值型及非加值型營業稅法) that will reduce taxes on imported corn, wheat, barley and soybeans. The tax will hopefully lead importers of these commodities to cut prices accordingly. But such a measure will provide only a small margin of relief, as commodity prices are likely to keep rising and there are no signs the surge will end soon.

On Feb. 27, the Cabinet again instructed the state-run CPC Corp, Taiwan (台灣中油) to put off hiking fuel prices, possibly for fear of angering motorists ahead of election day. But the government's suppression of domestic prices, which do not reflect the actual level of global crude oil prices -- US$105 to US$106 a barrel last week -- will only lead to much bigger hikes once the price freeze ends.

Putting off the inevitable will also lead the public to brace for a steep hike, decreasing their confidence in the government's capacity to contain inflation.

As nearly every daily necessity has become more expensive lately, the central bank seems to have become more comfortable with watching the NT dollar rise as it seeks to ease inflation. However, using the NT dollar's appreciation to contain import prices has its limits, too. One of the potential risks is that the measure could compromise the competitiveness of Taiwanese exports.

At the same time, as the NT dollar has appreciated, pressure on manufacturers to pass on rising costs to consumers rather than absorb them seems to have increased as well. The wholesale price index rose at an average annual rate of 9.24 percent in the first two months of the year, up from 7.51 percent in the fourth quarter of last year.

On a positive note, there are no signs so far that the inflation will transform into "stagflation," which would deal a far greater blow to the economy. But the government needs to balance its inflation control and economic growth measures. Looking at the economic climate abroad, this should be high on the agenda of the next government, regardless of who is sitting in the presidential office.