The DGBAS attributed November's monthly increase to a 12.8-percent hike in food prices, one of the seven sub-indices that comprise the consumer price index, which is considered a benchmark for inflation. "Food prices were a major culprit behind the CPI's upward trajectory," Wu Chao-ming, a DGBAS section chief, said Dec. 13.
Domestic and international factors had both been significant factors, he said, citing the extensive destruction of agricultural produce caused by the summer typhoon season. In addition, wholesale prices for soybean, corn and wheat on the international markets have also seen record prices over the last few months. "Adding all this together, prices will most likely stay high in the near future," Wu explained. "However, Taiwan's 2.4-percent rise from January to November is low in comparison to other countries' figures. China's food prices increased 11.3 percent from January to October, with Hong Kong and the United States seeing a 3.8-percent hike over the same time period of time."
Rising oil prices also pose a major inflationary concern. Last month, the price surged 15.9 percent compared to November last year, ending at US$89 per barrel. Domestic prices for 95-octane unleaded gasoline reflected this jump, increasing 17.2 percent to end at US$0.94 per liter. Wu said the DGBAS expects a yearly 1.7-percent increase in the CPI for 2007, higher than the 1.39-percent increase forecast by the Chung-Hua Institution for Economic Research Dec. 4.
Meanwhile, the core CPI, which excludes fresh fruits, vegetables, fish and energy expenses, rose 2.36 percent in November, the greatest single-month increase since March 1999. It was also the fifth consecutive month in 2007 that saw a rise of more than 1 percent. Because the core CPI generally resists such fluctuations, the increases may indicate that inflation has become a chronic issue. Once the core CPI has gone up, it tends to stay up, Wu added.
The wholesale price index also rose 8.23 percent in comparison to last November's figures--the highest single-month increase since September 2006. According to the DGBAS, this was due to having to pay more for oil- and coal-based products and base metals. Last month's WPI was also up 2.44 percent from October's 5.79 percent, and the overall index for the first 11 months of the year rose 6.27 from a year earlier, according to the DGBAS. "A rising core CPI and soaring WPI suggest that inflationary pressures will remain high in the coming months," Renee Chen, a Citigroup economist, said Dec. 12.
To keep inflation in check, Taiwan's Central Bank of China is widely expected to raise the policy discount rate by one eighth of a percentage point later this month--making it the 14th quarterly increase since October 2004. Assuming the expected hike is approved, the interest rate would have been raised a total of 1.87 percentage points since 2004. The bank moved up the regular meeting of its board of directors and supervisors from Dec. 27 to Dec. 20 to deal with the pressing issue.
Opposition Kuomintang Legislator Lee Jih-chu urged CBC Governor Perng Fai-nan Dec. 6 to take measures to appreciate the New Taiwan Dollar. "The Central Bank shouldn't use the nation's excessive capital outflow as an excuse to weaken the New Taiwan Dollar's exchange rate against the greenback," Lee said to Perng.
Furthermore, domestic investors care little about the New Taiwan Dollar's exchange rate when investing in U.S. Dollar-denominated overseas funds or Chinese shares, she said. Therefore, weakening the New Taiwan Dollar will hardly be an effective measure in curbing future capital outflow. Such action is also likely to drive up domestic commodity prices because the price of imported products is almost sure to go up.
She claimed that by hiking interest rates, the government is unfairly leaving the general public with less income to deal with higher import prices and climbing rates. Businesses that had taken out loans would also feel the pinch, and the local economy will certainly suffer in the long run.
In response, Perng said the CBC would "prudently review the consequences of another interest-rate hike." He noted that forceful implementation of a tight monetary policy in fighting cost-driven inflation would have a limited effect, but would exact a high price on the economy. Perng also rebutted reports that the CBC had hindered the appreciation of the New Taiwan Dollar. "The CBC allows the market to decide the valuation of the New Taiwan Dollar," he stressed.
In related news, the CBC announced in early December that Taiwan's foreign exchange reserves hit a new high, ending November at US$270.09 billion. This represents an increase of US$128 million over the previous month's level and ranks Taiwan fourth in the world behind China, Japan and Russia.
Write to Liu King-pong at kpliu@mail.gio.gov.tw