Last week, Minister of Economic Affairs Shih Yen-shiang (施顏祥) said in a question-and-answer session in the legislature that he would step down from his post if the government failed to keep inflation at no more than 2 percent this year.
Shih made the pledge to show his determination to take responsibility for the government’s recent decision to raise domestic fuel prices this month and hike electricity rates next month, which has triggered public fears of rising inflation and is beginning to impact consumers’ willingness to spend.
Shih may risk losing his job, as most economists forecast that the increases in fuel and electricity prices could lift annual growth in the consumer price index (CPI) to levels nearing 2 percent this year, while Directorate-General of Budget, Accounting and Statistics Minister Shih Su-mei (石素梅) warned there was a chance that the headline inflation rate might move above 2 percent this year.
Whether Shih delivers on his pledge to resign or keeps his post, people generally will not care about who steps down in the government. Rather, they tend to pay attention to how deep their pockets are and how much they can buy.
In economics, there is a simple definition of inflation: An increase in the cost of living in terms of daily necessities, or a decrease in the value of money. Either way, inflation leads to a decline in purchasing power. Apparently, the recent increase in the public’s inflationary expectations stems from the government’s announcement of fuel and electricity rate hikes, which has caused a ripple effect on domestic consumption.
Although most economists say the fuel and electricity price hikes would likely cause only a one-off impact on the level of headline inflation, it is the indirect impact of these price hikes on private consumption and investment, especially in low-income households and small businesses, that deserves the government’s attention.
For instance, some retailers have started raising the prices of goods on which most people are obliged to spend their hard-earned money. Some local bakeries, breakfast chains and even shops that sell lunchboxes said they found it increasingly difficult to make ends meet, while major department store chains and auto vendors reported significant declines in their sales this month in the face of the increasingly negative business environment at home.
On the other hand, there are reports that some companies in the real-estate sector have begun to encourage people to buy houses, saying that it is a good investment to make during times of rising inflation, while several construction firms have reportedly considered increasing housing prices, a move that has immediately raised eyebrows and concerns at the central bank.
These expectations of inflation pose a test for the central bank’s ability to adjust interest and currency exchange rates to stabilize prices. However, compared with inflation, the fear of a rapid decline in domestic consumption looms large, and that deserves extra government attention, especially considering the recent economic data that suggested slowdowns in exports, export orders and industrial production as well.
While headline inflation remains under control for the time being, people’s high inflationary expectations will give birth to a vicious cycle of endless price increases and a continued decline in purchasing power in the long term, challenging the government’s ability to do economic maneuvering.