Underestimate the Dangers of Inflation, and Pay the Price
China Times editorial (Taipei, Taiwan, ROC)
June 24, 2008
International oil prices have skyrocketed from 100 USD a barrel at the beginning of this year to their current high of 140 USD a barrel. Although Saudi Arabia has agreed to increase production, oil prices will continue to rise. The entire world is faced with an inflationary crisis. Taiwan's Core Consumer Price Index (CPI) for May rose to its highest level in nine years. Its Consumer Confidence Index (CCI) fell to its lowest level in over seven years. Given prevailing public expectations, the Central Bank should take concrete action and demonstrate its determination to fight inflation.
Recently 30 major oil producing and consuming countries gathered in Jedda, Saudi Arabia, to discuss how to defuse the crisis in international oil prices. The largest oil-producing countries Saudi Arabia agreed to increase productivity beginning in July to 20 million barrels, from 9.7 million barrels per day. This is already the highest level of production since 1981, yet international crude oil futures prices continue to rise, with no signs of easing. Since 2000, international oil prices have increased 500 percent. Such a huge increase has led to comparable increases in fuel prices and other consumer product prices. Crop prices have increased several hundred percent. The impact on ordinary salaried workers has been horrific. The poor are having an even tougher time.
According to research from the Directorate General of Budget, Accounting and Statistics (DGBAS), the core CPI of 3. 23 percent in May established a new, nine-year high. In May the price of powdered milk, eggs and other foods increased by as much as 20%. The price impact on those who dine out has been as much as 10%. The May Consumer Confidence Index fell to a five-month low in 2007. With the new government's return to office, oil, electricity, and transportation costs have also risen. Public confidence in future prices is very low, Expectations of inflation are increasing.
When Ma took office, people genuinely expected to see better days. They did not expect international oil prices to shoot up further before the US subprime mortgage crisis took a turn for the better, the international political and economic situation became even riskier, and life became even harder. Under the impact of the US subprime mortgage crisis, global stock markets performed poorly. No one expected the once optimistic TAIEX to experience a 19 day losing streak. After the Ma administration took office, the global stock market hit bottom. People already suffering from rising prices found their funds frozen and their wallets shrunken. Many wondered whether the Ma Hsiao team had lost its magic touch. People expected the Old Hands of the Ma Hsiao team to take firm control. Increased fuel prices and electricity prices were intended to stimulate domestic demand. No one expected them to create problems, generate resentment, and trigger criticism.
In all fairness, Vice President Vincent Siew, Premier Liu Chao-hsuan, and Deputy Premier Chiu Cheng-hsiung held key positions during the Asian financial crisis 10 years ago, and have extensive practical experience dealing with financial crises. Today, 10 years later, the seriousness of the US subprime mortgage crisis has exceeded public expectations. Recently major Wall Street investment banks have been downsizing due to numerous losses. US stock markets have suffered a series of setbacks. The impact on Asian countries is gradually being felt. Most analysts never expected an Asian financial crisis, because Asian countries' economic structures are different from a decade ago. Many nations' economic and financial situation is sounder than 10 years ago, and should be able to cope.
Among the Asian countries only Vietnam is worrisome. A year ago Vietnam joined the World Trade Organization. It was the most attractive of the emerging batch of Southeast Asian tigers. Who knew one year later its status would change dramatically. Its stock market fell by 60%, real estate fell by 50 percent, and the exchange rate for their national currency is expected to depreciate by 30%. International credit rating companies blame the Vietnamese Central Bank's timid measures in response to inflation, set a poor example. In May this year, Vietnam's inflation rate touched off alarm bells. Consumer prices suddenly surged 25 percent, frightening away investors. Most analysts believe the Vietnamese Central Bank's interest rate increase was "too little, too late." This eventually resulted in runaway inflation. The main reason the Vietnamese Central Bank delayed raising interest rates was that political considerations outweighed all others. They worried that rate hikes would affect economic development. Indecisive wavering led to precisely the results they hoped against.
Vietnam's painful experience offers an object lesson for other Asian countries. If the authorities lack experience, and political considerations are foremost, a once stunning economic growth rate and investment environment will rapidly come undone. At the slightest rustling in the grass, and foreign investors who rushed to get in, will be the first to get out.
Taiwan's inflationary pressures are currently less serious than Vietnam's. Taiwan's economic structure is more mature than Vietnam's. But Vietnam's plight should not be taken lightly. Taiwan's economy relies primarily on exports. The NT dollar exchange rate increased this year by seven percent. To maintain export competitiveness, the banking sector thinks the central bank is unlikely to go all out by allowing the NT dollar exchange rate to float. Therefore raising interest rates has become a major tool to curb inflation. Over the past four years, the Central Bank has raised interest rates a total of 15 times. It has raised interest rates a total of 2.125 percent. But banks actually raised interest rates by only one percentage point. In fact, the impact was very limited.
Taiwan relies on imported gasoline. It is currently experiencing its most serious inflation in a decade. Taiwan's interest rates are low by Asian standards. If the Central Bank fails to show greater determination in its fight against inflation, if it worries about its every move, the consequences will be catastrophic.