Few will be shocked to hear that premier-designate Liu Chao-shiuan’s (劉兆玄) new Cabinet will target consumer prices as one of three priorities after taking office on May 20, as rising prices for food, energy and other commodities threaten household consumption amid stagnant wages.
A poll released last week showed that 78.4 percent of top business executives believe that this is the correct approach.
The latest official inflation data showed that the consumer price index (CPI) rose 3.65 percent year-on-year in the first four months of the year, exceeding the government’s target of 2 percent. Inflation may quicken because price pressures have not been confined to surging global fuel and commodity prices; they appear to be more broadly represented across the economy.
Liu is right to address this issue by resorting to market mechanisms instead of government controls. The outgoing government’s controls may be politically wise for a short period, but to some extent they have distorted the market mechanism that sets prices.
Price controls may help keep CPI at a pleasing level, but they do not necessarily tame inflation. They also go against the business of business: Very few companies in democratic countries are willing to sacrifice profits to focus on social responsibility.
Despite criticism that price controls only delay increases in production costs and fail to address problems underlying them, in imposing such measures policymakers do buy time to consider other options.
With the outgoing government out of options — it has run out of time, and rising costs are largely driven by imports anyway — the new administration must confront the problem at a time that consumers are facing considerable erosion of the value of their wages. The situation is worrying, given that Taiwan experienced negative growth of 1.52 percent year-on-year in real wages during the first two months of the year, the worst level in 27 years, according to government figures.
Unfortunately, incoming Cabinet members are saying they will do nothing other than lift the cap on fuel prices — with electricity rates and water prices to come.
If true, the new administration should prepare for an unpredictable ripple effect from energy prices to daily necessities. It must also realize that any upward price adjustment could hurt consumption and domestic spending, a situation that could damage economic growth as the nation faces a challenging year on the trade front.
These concerns are not baseless. The latest official figures show that export growth unexpectedly fell to 14 percent year-on-year last month, after accelerating to 22.8 percent in March, up from 18.3 percent in February. The data reveal not only an across-the-board slowing of exports but also that strong Asian demand, which has supported Taiwan’s exports over the past several months, may weaken.
Some members of the incoming government have criticized the outgoing government’s price control measures as making the problem worse. But it’s easy to sound wise when you’re in opposition and the government is struggling.
Barring price hikes, the public would prefer to know how the new government will address slow wage growth, boost capacity and profitability of local industries, and shield the nation from imported inflation.