As fuel prices rise, most consumers are trying to control their expenses either by cutting back spending on other items or opting for less-expensive means of transportation.
In other words, consumers are responding to a typical microeconomic concern by looking for cost-efficient substitutes, carefully considering their options to cut costs, such as adjusting their purchases and reliance on services or looking for extra income.
But at a macroeconomic level, the situation may prove much more complex for the central bank when its board members meet on Thursday to address rising inflationary pressure.
What has made the situation more challenging since the central bank’s last meeting is an apparent inconsistency between the government’s pro-growth policies and the central bank’s measures to stop inflation.
When faced with inflationary troubles, the central bank has conventionally raised its benchmark interest rates for commercial banks’ short-term loans or reduced excessive liquidity in the banking system by requiring commercial banks to lift their reserve requirement ratios.
But this time, monetary tightening will only be the first step for the central bank in dealing with inflation. That measure alone will not achieve the desired effect.
Price fluctuations are disconcerting because the inflation problem is rooted in soaring global oil and commodity prices. As a result, the central bank will need the government to exercise stringent fiscal discipline and cut commodity taxes to help combat the problem.
President Ma Ying-jeou’s (馬英九) administration is clearly focusing on infrastructure projects, increasing cross-strait trade and promoting the services sector to boost domestic demand and maintain economic growth — a promise it had made before assuming power.
While an aggressive fiscal policy is likely to help stimulate growth in a slowing economy, it will increase upside inflation risks amid high oil and commodity prices — a consequence that will undermine the central bank’s efforts.
The latest government statistics show that consumer prices have grown 3.66 percent in the first five months of the year from a year earlier, while wholesale prices have gained 8 percent over the same period.
The pressure on prices is likely to increase in light of the recent hike in fuel prices and an expected increase in electricity prices next month.
It will not come as a surprise if the central bank takes monetary policy measures again to tackle inflation, but using policy tools effectively will be challenging, as rising living costs have already hurt the popularity of Ma’s administration, polls indicate.
The strength of the NT dollar will also influence inflation in the coming months. Although the central bank has tolerated a relatively strong NT dollar since early this year — partially to offset the influence of rising prices of imported commodities — it remains to be seen how much the local currency will be able to appreciate without hurting exports.
Another factor that must be taken into account is the upcoming US Federal Reserve’s decision on interest rates. The Fed may delay raising rates when its policymakers meet on Wednesday to prevent further writedowns in the credit market. Its decision will affect whether the central bank continues its mild interest rate hikes or adopts more aggressive measures to slow inflation.
The choice will not be an easy one for the central bank: An aggressive rate hike will dampen economic growth. On the other hand, making another mild move will not resolve the problem of negative real interest rates, but rather aggravate inflation concerns as the public faces more increases in living costs ahead.
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