ASIA NEWS NETWORK
WE KNOW ASIA BETTER
2 percent inflation good for Taiwan's economy, says economic researcher
Publication Date : 29-07-2013
Despite looming energy price pressures, an economic think tank expects Taiwan's consumer price index (CPI) to remain flat for July and the remainder of the year but urged less price controls to allow inflation to rise to 2 percent to promote economic growth.
According to figures released by Directorate-General of Budget, Accounting and Statistics (DGBAS), Taiwan's CPI of 102.75 — 2011 as base year — increased by 0.6 percent on year, the lowest rise since March 2012.
The CPI is used to measure changes in the price level of a market basket of consumer goods and services purchased by households. With Taiwan's average annual inflation of 1.5 percent over the last two decades and June reading the second consecutive month below 1 percent, Taiwan's domestic consumption apparently remains in the doldrums.
Regarding July CPI, which will be released on August 5, Mega Holdings analysts adopted an offbeat outlook on the back of consecutive declines of the wholesale price index (WPI) and predicted flat activity or a slight drop for July CPI.
June's CPI at 15-month low, combined with other business cycle index including a lower-than-expected gross domestic product (GDP) growth rate and private consumption, has fueled talk on whether Taiwan in toppling into deflation.
Taiwan's wholesale price index (WPI) for June at 96.38 rose 0.4 percent on month but slipped by 1.9 percent on year.
However, Liu Meng-chun director of the Center for Economic Forecasting under the Chung-hua Institution for Economic Research (CIER), told The China Post that Taiwan, despite stagnating income and slowing economic performance, is still a long way from deflation.
Despite major think tanks' recent downward adjustments to GDP forecasts, Liu emphasised that Taiwan's economy this year will outperform its 2012 results.
On the other hand, although prices are lower than real values, Taiwan's CPI, except for several months during 2008-2009 when the US financial crisis was in full swing, rarely registered a decline.
He used Japan as an example and said that the world's third largest economy has been mired in negative CPI movement over the last two decades until recently when its own version of quantitative easing (QE) took effect.
Liu predicts Taiwan's CPI will remain flat for July and stand above 1.5 percent for the whole year.
On the basis of CIER's macroeconomic forecasts released on July 24, Liu noted that the real issue Taiwan is contending with is how to reach a higher inflation goal, saying that a 2-percent CPI rise would be better for Taiwan.
Nearly constant low CPI increases indicate years of low-salary levels are strangling Taiwanese willingness to spend money.
“The Central Bank's control on 'hot money' is too tight,” Liu said.
The service industry, including banking, catering and tourism, now contributes to 70 percent of Taiwan's GDP value, and while private investments are in a plight, the government should be more flexible on capitalising on so-called “hot money”, which includes foreign direct investment.
Taiwan can foster economic growth and boost salary levels if it opens up to foreign investors, which could be now the only way to reach a healthy 2-percent CPI, promote domestic consumption and kick-start economic growth.