Sun, May 15, 2011 - Page 8 News List

EDITORIAL : Government needs inflation plan

Three years ago, when the nation’s economy was facing heightened inflationary pressures driven by rising oil and food costs, the government was severely criticized over its measures to alleviate people’s financial pain. Good or bad, that year’s price pressure was later replaced by the US subprime mortgage problem and ensuing global financial crisis, and the public’s complaints against the government subsided accordingly.

This year, Taiwan, along with many Asian economies, is again facing higher consumer inflation, driven by a steady increase in food and energy prices. On Friday, a survey released by the Consumers’ Foundation showed that 60 percent of the 1,234 respondents said they felt strongly about the rise in commodity prices this year and about 57 percent of respondents said the government’s measures to deal with the price issue were insufficient.

So, is the government waiting for a global financial or economic crisis to come to its rescue again? It had better not.

The public has indeed been under increasing pressure from price rises recently, as the latest government data showed the average price of 16 key daily necessities — including flour, meat, eggs and vegetable oil — grew 3.6 percent year-on-year last month, compared with increases of 3.4 percent in March, 3.3 percent in February and 2.6 percent in January.

What’s more, growth in the core consumer price index (CPI) — which excludes vegetables, fruit and energy items — expanded slightly to 0.99 percent last month from a year ago, following an increase of 0.98 percent in March.

To help deal with inflation, the government is proposing a hike in civil servant pay and hoping that private-sector businesses will follow suit. The government has also lowered import tariffs on certain agricultural commodities and instructed the state-run oil refiner CPC Corp to partly absorb the rise in fuel costs to help stabilize prices, while the Fair Trade Commission has launched investigations to uncover unfair price increases.

However, the prices of oil and agricultural commodities are volatile and subject to global political turmoil and abnormal climatic phenomena like floods, droughts and storms. Against this backdrop, the central bank seems to have become more comfortable with watching the New Taiwan dollar appreciate as it seeks to contain inflation.

However, using a strong NT dollar to partially offset the gains in imported commodities has its limits, because this measure could harm the competitiveness of Taiwanese exports. Based on the central bank’s data, the NT dollar has appreciated by 5.5 percent against the US dollar so far this year, the largest rise among major Asian currencies. This compares with a 4.4 percent rise by the South Korean won.

The central bank has used interest rate adjustments to slow the price pressure over the past four quarters and it certainly should not surprise anyone if the central bank chooses another rate hike of 0.125 percentage points at next month’s quarterly board meeting. The problem is the central bank’s mild pace of rate hikes still lags behind the rising pace of commodity prices.

The impact of inflationary pressures driven by import costs is inescapable for Taiwan, as our economy is heavily dependent on imported industrial and agricultural raw materials. The government’s efforts to deal with price pressures, such as lower import tariffs, fuel subsidies and monetary policy adjustments, have been of limited effectiveness.

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