Fri, Feb 25, 2011 - Page 8 News List

How to deal with rising prices

By Wu Hui-lin 吳惠林

The lunar new Year break has only just ended and we are faced with yet more price increases. This means higher commodity prices, but also higher public utility rates, raising the price of water, electricity, gas and oil.

The government, responding to pressure from a public frustrated by the rising cost of living without any corresponding increase in salaries, has announced countermeasures. Taiwan Sugar Corp has said that, for the time being, sugar and salad oil prices will be frozen. The Ministry of Finance has announced it will halve the customs duty on commodities such as flour, and the Industrial Development Bureau has held talks with several trade associations, appealing to their sense of morality in the hope that they will keep profits reasonable, and not contribute to driving prices up further.

In addition, the Fair Trade Commission has approached certain companies and is monitoring the situation closely. Finally, the central bank is adopting a two-pronged approach to stabilizing prices, first by raising interest rates to restrict the money supply and secondly by artificially suppressing the exchange rate of the New Taiwan Dollar.

President Ma Ying-jeou (馬英九) called a ministerial meeting recently to discuss the problem. Shortly thereafter, the government declared war on inflation, promising heavy sanctions for speculators. These measures have been applauded in some quarters, but are unlikely to prevent prices rising further, and leave the government open to accusations of being heavy-handed.

More importantly, these price increases were predicted some time ago. We can expect a conspicuous rise in domestic production costs, driven by various international factors such as higher oil prices due to the unrest in Libya and the relentless increase in the cost of raw materials around the world. Such developments, known as cost-push or cost-input factors, will have an unavoidable knock-on effect on commodity prices.

Prices are generally decided by the forces of supply and demand. It is on the basis of these “true signals” that suppliers and users of goods and services make informed decisions. Prices are going up at the moment, and cost increases are affecting supply lines, but the actual scale of the increases is contingent on the demand side. Falling demand might suppress inflation or even cause prices to drop again.

Therefore, if inflationary pressure is predominantly demand-driven, what is termed demand-pull inflation, consumer behavior climbs into the driving seat. Basically, if consumers curb their spending, prices stabilize. The question is, will they?

This depends on whether a given commodity is considered indispensable, whether consumers have the money to buy it, the existence of a viable substitute and the extent to which that commodity is replaceable.

Another factor is the degree of free competition in the commodities market. The public utilities sector is traditionally the least competitive, and is therefore vulnerable to the emergence of monopolies, which is precisely why it is kept in the public sector. In principle at least, public utility prices should reflect actual costs, their remit being to operate in the interest of the public and to, as much as possible, keep prices down.

Public utilities companies are not known for being run particularly efficiently, and their costs are therefore quite high. Also, in Taiwan, the profitable ones are required by law to hand over any surplus to the national coffers. With no real incentive to keep prices down, why would they? The government should audit the business models of these companies. Although reducing customs duties to keep the market open and deregulated is the correct approach to controlling domestic commodity price rises, it should not be used merely as a tool to tweak the economy at will.

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