Inflation finally showed signs of slowing down last month, with the consumer price index (CPI) falling below 3 percent for the first time in six months, government data released on Tuesday showed. The CPI grew 2.66 percent from a year earlier, compared with a 3.36 percent increase in July, the Directorate-General of Budget, Accounting and Statistics (DGBAS) said. On average, the CPI increased 3.1 percent year-on-year in the first eight months of the year, with the core CPI — which excludes volatile food and energy costs — rising 2.49 percent from a year earlier, the agency said.
While high prices for eggs, meat, fruit, fish, dining out, fuel, rent and household products drove the CPI increase, lower prices for vegetables and communications equipment partly offset the rise, it said. Even though last month’s CPI growth moderated from the previous month, inflation could remain sticky in the near term, it added.
The good news is that the CPI has likely peaked and will not exceed 3 percent again as long as international energy and commodity prices are not subject to any more upside risks, the DGBAS said. The bad news is that the New Taiwan dollar is still prone to a weakening bias, as the US Federal Reserve’s increasingly hawkish stance continues to push foreign institutional investors to move funds out of Taiwan. That is a wildcard for the inflation outlook, as a weakening NT dollar leads to higher import prices and adds pressure to imported inflation.
Economists are becoming more concerned about the negative effects of a weakening NT dollar on inflation. Some have suggested that the government rein in imported inflation by pushing up the value of the NT dollar, with some calling for state-run CPC Corp, Taiwan and Taiwan Power Co to continue absorbing cost increases, while others say that price controls are needed for certain household items to help ease import-driven inflation.
The Commerce Development Research Institute last week warned that seeking to stabilize prices by unilaterally suppressing demand would risk creating “stagflation” or a recession. Instead, it said Taiwan should invest in public infrastructure and promote private investments that could substantially increase domestic production and reduce the pressure of rising costs of imported goods. Such an “import substitution” approach could help narrow the gap between supply and demand, and generate a synergy of economic growth and stable production, it said.
Although there are other means the government can use to fight inflation, new challenges under the current geopolitical and macroeconomic situation continue to emerge. Moreover, the devaluation of Asian currencies has only just begun to accelerate, with the Japanese yen falling to a 24-year low, the South Korean won dropping to a 13-year low, the Chinese yuan approaching a critical 7 per US dollar level and the NT dollar down to a three-year low. Most currencies in Asia are being affected by the US dollar’s rally this year and there is no sign they will stop falling soon.
In the short term, Taiwan continues to face foreign fund outflows due to the Fed’s rate hikes and tension across the Taiwan Strait. With the devaluation of Asian currencies, the foreign capital outflows in the region could continue and the inflationary pressures are likely to remain high. Against this backdrop, the central bank’s monetary policies and the government’s financial and fiscal policies must be formulated flexibly to address the nation’s challenges in a timely manner.
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