Retail prices have been increasing gradually for the past few months. Consumers are feeling the squeeze, especially when it comes to food. Costs have been on the rise for groceries, street food, fast food and buffets in upmarket hotels.
In addition to rising costs, the global shipping crisis has severely affected businesses and industry, resulting in a shortage of a number of foods, such as McDonald’s hash browns and imported meat.
Statistics show that since consumer price index growth surpassed 2 percent in the second quarter of last year, it plateaued before hitting a nine-year high in November last year. The trend continued to last month, when it rose 2.62 percent.
Despite having had no spikes in the past few decades, inflation is coming back stronger than ever, and is to be part of this year’s economic story.
While the government assures the public that inflation is “transitory” and nothing to be worried about, it has been adopting countermeasures, implementing a price stabilization mechanism in public infrastructure, applying flexibility on reducing import tariffs and excise taxes, and establishing cross-sector groups to track down unscrupulous retailers who had been driving up prices.
At the same time, in the hopes of mitigating the impact of inflation, the government this month raised the minimum wage by 5 percent, and increased pay for military personnel, civil servants and public-school teachers by 4 percent.
Taiwan is not alone in dealing with inflation. US consumer prices rose 6.8 percent in November, the fastest pace since 1982. As consumer prices rose to a 40-year high, nearly 70 percent of people in the US were dissatisfied with US President Joe Biden’s performance in curbing inflation.
Consumer prices soared 5 percent in the EU last month, a record high. Germany’s inflation has also hit its highest level since 1993.
In central Asia, Russia had to send troops to Kazakhstan, the the world’s largest landlocked country, to quell violent protests that were in response to soaring inflation, including gas prices.
If the fluctuation in retail prices is a global phenomenon, then the underlying reason is that the global economy is flush with cash. Economist and Nobel laureate Milton Friedman in 1963 said: “Inflation is always and everywhere a monetary phenomenon.”
Central banks around the world have been conducting quantitative easing by reducing interest rates and purchasing government bonds, stocks and other financial assets.
With governments having decided to expand quantitative easing in response to the COVID-19 pandemic, the global economy is overflowing with cash. With so much money trying to buy limited assets and resources, inflation is inevitable. The most obvious examples are booming stock markets and housing markets, while the prices of raw materials and consumer goods have skyrocketed as well.
Rising food prices have had the largest repercussion on consumers. A UN Food and Agriculture Organization report said that last year’s average food price index showed the largest growth in a decade with a 28 percent increase, and it is not expected to drop anytime soon.
In addition to factors such as supply-chain bottlenecks, labor shortages, severe weather and a surge in consumer demand, China’s hoarding of key commodities is also responsible for the price rush.
Taiwan, whose food self-sufficiency rate stands at 32 percent, has suffered as well, as reflected in the rising prices of imported grains and other agricultural products.
The global carbon reduction trend has caused agricultural prices to spike, and has generated an increasing demand for biofuels. Forty percent of soybean oil in the US and 50 percent of sugarcane in Brazil are turned into biofuels.
Meanwhile, urea fertilizer is manufactured from ammonia, the production of which uses reformed hydrogen from natural gas. As natural gas has fewer carbon emissions, rising gas prices have driven up the prices of ammonia and fertilizer.
Taiwanese farmers raised their concerns last week about the shortage of urea fertilizer due to limited global supply.
Global efforts to reduce carbon emissions have brought about inflationary pressures as well. As countries develop carbon-neutral approaches, different measures of decarbonization are now integrated into economic activity, affecting energy transformation and inflation. This results in “greenflation” — rising prices for minerals and energy that are essential to renewable technologies.
Taiwan faces struggles in power generation along with inflation. Businesses also need to pay extra costs for going green. Greenflation is here to stay, and suggests that carbon neutrality is closely associated with chronic inflation and rising retail prices.
Gradually rising retail prices are not necessarily bad, for it implies strong economic activity. However, persistent and record-breaking inflation deserves attention. Unreasonable inflation raises inflation expectations even further, resulting in price increases across the board.
The worst-case scenario is stagnation in economic output. Inflation could most severely affect the working class, posing a threat to economic and social stability.
Tunisia’s Jasmine Revolution, which sparked the Arab Spring movement in 2010, was triggered by economic stagnation. Although Taiwan is grappling with rising price pressures, inflation should not be a problem if it is handled wisely.
Nevertheless, two experts in economics have proposed intriguing ideas about the economy.
Central bank Deputy Governor, Chen Nan-kuang (陳南光) said that quantitative easing that leads to low interest rates has driven up housing prices. The central bank should “shoulder the burden alone” and keep the possibility of raising interest rates open.
Former deputy central bank governor Shea Jia-dong (許嘉棟) said that low wages result from low costs of goods. This has created a vicious cycle in which the public has long been accustomed to a “cheap” life and would find rising consumer prices hard to swallow.
Shea said that the government should use the recent increases in public-sector salaries as a reason to relax price controls, and raise utility costs and health insurance premiums to prevent consumers from wasting resources. Private businesses could also increase salaries, offering a way out of the “low wage, low price” predicament. As Taiwan’s economy took flight in the 1970 and 1980s, it overcame the challenge of inflation. Following globalization, consumer prices became relatively stable after the 1990s.
US economist Lester Thurow once called inflation an “extinct volcano,” an issue not worth worrying about.
Now that consumer prices are on the rise and likely to persist, it is a challenge that Taiwan, as an export-oriented economy, should not underestimate.
Translated by Rita Wang
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