Countermeasures Devised to Fight Rising Commodity Prices

Storm-triggered disasters that Taiwan has suffered over the past few months have kicked consumer prices up a few notches. Food, the category nearest and dearest to consumers, rose 5.36% in July due primarily to typhoon damage to vegetables and fruit, the prices of which increased 20% and 23%, respectively. Soaring international oil prices forced China Petroleum and Formosa Petrochemical gas stations to adjust their prices, and could push electricity prices up and put further pressure on domestic prices in the latter half of the year.

Further price increases could produce negative real interest rates (real interest is the bank interest rate minus the inflation rate), which means that the real value of bank accounts would shrink. Although Taiwan's central bank, the Central Bank of China (CBC), has raised interest rates four times since late September last year to keep inflation in check, prices continue to mount.

According to the CBC, interest on one-year fixed deposit accounts is currently around 1.79%, so real interest rates remain negative and long-term real interest rates will continue to drop. This is bad news for salary workers putting away money in the bank.

To make matters worse, salaries are shrinking. According to DGBAS figures, since September of last year, after adjusting for price index changes, average real paychecks in Taiwan shrank by 4%. Faced with these twin pressures, the public is cutting back and holding onto their money, putting the economy into reverse. Experts are concerned, because nobody is making any money.

The current surge in inflation can be traced back to continued rises in international oil prices, which recently topped US$65 a barrel, causing both China Petroleum and Formosa Petrochemical, both of which already raised prices by 7% in early August, to bite their nails. Looking to the future, China and India, two emerging heavyweights with populations bursting at the seams, are consuming tremendous amounts of resources and raw materials, pushing up the prices of almost all conceivable commodities worldwide. The situation isn't expected to reverse itself anytime soon. The world has no choice but to sit by and watch as wallets shrink and buying power declines.

Speaking in reference to inflation pressures, Premier Frank Hsieh has stated in no uncertain terms that water prices would not be raised this year. That was not necessarily the case with electricity, but the government would do its best to stop any increases. Ho Mei-yueh, the minister of economic affairs, has stated that to keep consumer prices in check, she does not support further price increases by China Petroleum. Formosa Petrochemical has explained that it has no plans at this point to increase the prices of petroleum products any more this year. The Council of Agriculture has stated that increases in vegetable prices over the short-term have been, for the most part, the result of climate-related factors, and promises that agricultural agencies will stabilize vegetable prices by bolstering buffer stocks.

There is one piece of indirectly comforting news for consumers. The Department of Taxation under the Ministry of Economic Affairs says that from the end of 2000 to July of this year, the CPI increased nearly 4%. According to current regulations stipulated under the Income Tax Law, if aggregate inflation since the last adjustment exceeds 3%, all deductibles and exemptions are to be increased, including exemptions for individual consolidated income tax, standard deductions, special deductions for salaries and wages, and special deductions for the disabled.

Thus, if prices continue to rise, the various exemptions and credits will be increased in November. The new deduction and exemption levels are expected to be implemented when taxpayers declare their income taxes in 2007 for 2006. Tax exemptions are expected to increase up to NT$8,000 per person.

Hu Sheng-cheng, chairman of the Council for Economic Planning and Development, points out that the top priority for the next few months is to reduce the impact on the economy by focusing on price controls. The impact of a variety of factors, both international and domestic, however, will make it difficult to keep consumer price inflation for this year below 2%, but an inflation rate below 3% should be tolerable.