Inflation Monster to Eat Taiwan?

Everyone's been experiencing it: rising prices for daily goods. Bad news for a ruling party seeking to be elected, as the Taipei Times noted in a recent editorial:

On a positive note, the CPI only rose 0.90 percent for the first nine months of this year and the index is likely to stay under 2 percent for the whole year, the statistics bureau's forecast said. The public, however, does have reason for concern as almost every daily necessity has become more expensive.

The government's monthly shopping list provides a useful example. Of the 389 items the statistics bureau officials shopped for last month for price inspection, 248 items saw rising prices, 114 items posted falling prices and 27 items were unchanged.

Consumers focus on the results of the CPI statistics because inflation can undercut their purchases. This is particularly true when stagnating wages erode purchasing power.

But what is worth noticing for financial markets and households is the stronger-than-expected rise in core CPI statistics, which grew 1.94 percent last month from a year earlier, the largest annual increase since March 2002.

This figure -- the CPI excluding more volatile components such as the prices of fruit, vegetables, fishery products and energy -- is a major gauge of inflation risk that portends trends in consumer prices and changes in the central bank's monetary policy.

The continued increase in core CPI after expanding a revised 1.60 percent in August and 1.13 percent in July suggests that inflation risk is building and that price pressure is now expanding to non-volatile consumer goods.

This situation certainly increases the odds of another interest rate hike by the central bank at its next board meeting in December. A higher interest rate would mean less valuable government bonds for investors, rising borrowing costs for businesses and more interest income for depositors.

At home, my wife and have noticed price rises for almost every good -- even the tea has risen $5 per cup in many shops. As the editorial notes, this bad news lies athwart very good news: continued rising exports:

Taiwan's exports in September grew 10.6 pct year-on-year to an all-time high of 22.22 bln usd, compared with a 10.5 pct rise to 21.40 bln usd posted in August, the Ministry of Finance (MoF) said.

September's export figures marked the fourth consecutive month the island's exports by value set a new record high.

Meanwhile, imports in September rose 10.5 pct year-on-year to 19.07 bln usd, against a 0.3 pct decrease to 18.10 bln usd in the preceding month, it said.

Imports for the month were the second-highest on record, surpassed only by the 20.73 bln usd that was recorded in July of this year.

The September trade surplus, the 19th consecutive such showing since March 2006, stood at 3.15 usd, narrowing from 3.30 bln usd in August, the MoF added.

In other words, Taiwan's overall economic performance continues to be strong -- exports are at record levels, and will boom again in the fourth quarter going into the election. Taiwan has been showing a trade surplus for 19 months in row, and growth in every year since the first year of the Chen Administration. But as long as costs rise, driven by China's demand for raw materials, and rising oil prices, and consumers experience the squeeze of falling relative incomes, then it will all be for nothing. The DPP needs to get out and explain the problems to the locals, to head off the inevitable negative effects....

UPDATE: Bent replies, suggesting the unofficial dollar peg should be reconsidered.

[Taiwan]