Inflation is more tangible than strong economic growth for Taiwanese as global crude oil prices remain high amid war in the Middle East. Taiwanese are feeling the effects of the war such as rising food prices and supply chain constraints for products such as plastic goods. In such circumstances, economic growth limited to the tech sector is irrelevant to them.
As the US-Israeli war against Iran entered its eighth week, the Cabinet and the central bank are under pressure to tackle inflation, after the situation around the Strait of Hormuz has led to a crude oil supply crunch and prompted surges in energy prices.
Boosting the economy should not be high on the government’s agenda, as the economy is being spurred by strong artificial intelligence (AI) applications demand, given Taiwan’s essential role in the global AI supply chain.
Taiwan’s economy is expected to expand at an annual pace of 7.71 percent this year, following a string of upgrades, the Directorate-General of Budget, Accounting and Statistics (DGBAS) forecast in January before the US-Israel war against Iran started in February.
However, Taiwanese are facing a more practical and urgent issue — how to make ends meet amid rising basic living expenses. The core of the nation’s consumer prices has risen as inflation was only subdued last year with an annual increase of 1.66 percent after three years of rapid increases of more than 2 percent, an alert level according to most central banks worldwide.
A survey released on Monday by Cathay Financial Holding Co showed that members of the public are far more pessimistic about price hikes than government agencies. On average, people expect inflation to be at least 2.27 percent over the next six months, while about 60 percent of respondents said they expected inflation to surpass 2 percent, higher than the 1.68 percent and 1.9 percent estimated by the DGBAS and the central bank respectively.
The central bank’s inflation estimate made last month was based on global crude oil prices averaging US$100 per barrel. The price movement of global crude oil becomes crucial this quarter as the central bank cautioned that it could take a tighter or hawkish stance on monetary policy if the war in the Middle East lingers beyond this month. That would be in line with the action taken by the US Federal Reserve and other major counterparts.
The central bank hinted that it could hike key interest rates soon to combat inflation, boost the local currency’s value and increase local consumers’ purchasing power.
Over the past few months, the Cabinet has implemented several measures to stabilize consumer prices including freezing energy prices, suspending import taxes or commodity taxes on key raw materials or commodities through September, and halting increases in electricity tariffs.
Those short-term measures have kept consumer prices at a reasonable level. The nation’s consumer prices rose 1.2 percent last month, mainly due to a drastic decline in fruit prices, but the core consumer price index, which excludes volatile items such as fruit and energy, jumped 1.94 percent year-on-year, driven by rising dining out, housing and household management fees, and utility and transport costs, the DGBAS said.
The Middle East war’s impact on inflation is expected to become more obvious this month, some government officials said.
From the second quarter, another wave of price hikes is expected. PC vendors could hike prices by 25 percent to 30 percent to pass on surges in key component prices. Component suppliers attributed higher production costs to the war due to supply constraints of essential chemicals and gases such as photoresist and helium to metals.
The government should not underestimate the war’s impact on inflation. Even if the war ends this month, the supply of crude oil would not return to normal in the near term, as it would take several years and massive investments to restore the damaged crude oil production facilities. Taipei should come up with a long-term strategy to keep inflation under control. Enhancing energy supply resilience is a top priority in managing consumer prices. Taiwan should diversify its energy sources or step up domestic energy supply.
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