By Riley Walters
Inflation has become a concern in major economies like the United States and across the Eurozone. There are growing fears that the costs of goods and services are increasing at an alarming rate, and that these price increases could stretch household incomes to a breaking point. Central bank leaders, like US Federal Reserve Chairman Jerome Powell, have tried to assuage these concerns by saying that the increase in prices is “transitory,” or only short-term. However, even central bankers will admit they are not exactly sure when inflationary effects–like supply chain disruptions–will end. As a result, the US Federal Reserve is considering raising interest rates to help curb inflation.
In Taiwan, inflation has thus far been “controllable,” according to Taiwan’s central bank governor Yang Chin-long (楊金龍). Even though consumer prices hit an all-time high in November, prices cooled off slightly in December. While talk of rising prices can occasionally be alarming, inflation in Taiwan has yet to reach a level that should be of much concern. In fact, the current level of inflation in Taiwan is about where central bankers want it to be, and may remain controllable for this year.
What is inflation?
Generally speaking, inflation is the increase in the price of goods and services. It can also refer to the increase in the amount of money circulating in an economy. But when policymakers talk about inflation, they are usually referring to the price of all goods and services purchased by consumers, not just the price of one or two specific goods. For example, this can include the price of clothes, mobile phones, furniture, and automobiles, the price of gas, the price of food, the price of labor at a restaurant, and so on. Analysts will collect these prices in an index and measure them across time to determine whether they are rising or falling. Critically, different indexes will tell different stories.
Some indexes, like the one commonly referred to as core inflation, excludes the price of food and energy given how quickly and greatly these prices can change. Another will track the price of goods and services for producers. This will include the price of inputs like steel and lumber, as well as services like labor and transportation.
A moderate or low level of inflation is usually seen as a good thing. In fact, the US Federal Reserve, the European Central Bank, and the Bank of Japan—the monetary authorities for the world’s most used currencies—all strive to achieve an annual inflation rate of 2 percent. They find that this level of inflation means prices are growing but are generally stable, a dynamic that consumers appreciate. However, if inflation is too high price growth can outpace wage growth, meaning consumers can afford fewer things. And unlike wage growth, which tends to be relatively stable, inflation can be more volatile, given the changing nature of the market.
Of course, central banks and policymakers often have a hard time trying to achieve their goal of 2 percent, as many factors can affect prices. The Bank of Japan, for example, has been trying for years to increase Japan’s inflation rate beyond 1 percent through aggressive monetary policy. On the other hand, the United States has exceeded 2 percent inflation several times since the great financial crisis of 2009. Since April 2021, monthly inflation in the US has ranged between 4 percent and 7 percent, in part because of supply chain disruptions. As a result, we could see significant monetary changes from the US Federal Reserve this year. Generally speaking, since the beginning of the pandemic, most countries have seen an uptick in inflation due to supply chain disruptions. According to researchers at the International Monetary Fund, prices are rising at the fastest pace in almost four decades.
Inflation in Taiwan
Taiwan’s National Development Plan for the last eight years has focused on keeping inflation well below 2 percent. According to its most recent four-year national development plan, covering 2021-2024, it plans to target core inflation (consumer prices not including food and energy) growth between 1 percent and 1.5 percent.
Much like Japan, Taiwan’s inflation has not exceeded 2 percent growth for more than a decade. However, consumer prices did grow by just shy of 2 percent (at 1.96 percent) last year. This was mostly the result of increases in the price of food, fuel, and transportation. Without taking food and energy prices into account, core inflation only grew about 1.33 percent—well within the national development plan’s target. Overall, consumer prices are expected to grow anywhere between 1.1 percent and 2 percent this year, with core inflation expected at around 1.45 percent – pending any new major disruptions to global or regional supply chains.
Consumer prices did grow 2.9 percent in November and 2.6 percent in December compared to this time a year earlier–meaning the rate at which prices are rising is picking up pace (see chart below). According to officials, this growth of around 2 percent could continue well past the Lunar New Year. However, officials also expect consumer prices to cool off shortly after that.
Wholesale prices, on the other hand, tell a different story. These are prices generally paid for goods by distributors. While wholesale prices in Taiwan have yet to reach the highest they have ever been (the highest being back in 2008), the growth rate for wholesale prices is now the fastest it has ever been. Since May 2021, monthly wholesale prices have been increasing at a rate of around 12 percent. Meanwhile, the average growth rate of wholesale prices throughout the 2010s was basically zero. The recent increase was driven in part by rising import costs this year. Producer prices are also increasing–driven by an increase in the cost of inputs like energy, chemicals, and metals.
According to manufacturers in Taiwan, price growth has continued now for 19 consecutive months. For non-manufacturers, price growth has continued for 72 consecutive months but at a relatively slower pace. Whether these increases translate into even higher costs for consumers has yet to be seen, but is something to keep an eye on. For both manufacturers and non-manufacturers, not only have supply deliveries been slow but there continues to be a backlog of orders.
Supply chain disruptions continue to affect global prices. In the United States, for example, inflation is becoming a real concern, so much so that the Federal Reserve may begin raising its interest rates as early as March 2022 – shortly after Taiwan officials expect prices to cool off following the Lunar New Year. Taiwan’s central bank, along with other central banks, is now closely watching to see what the United States does and whether it should follow suit.
In a recent board meeting, Taiwan officials said that: “given the uncertainty over global inflation, if domestic prices are persistently higher, or pandemic-hit sectors regain solid footing, or major economies begin to raise policy rates, the Bank may, as necessary, adjust its monetary policy.” However, these officials would be amiss if they were to raise rates too soon just to keep inflation under 2 percent. Doing so might put pressure on the recent growth in Taiwan’s economy, as well as future growth. This is primarily because so much of the recent increase in prices is from supply chain disruptions and is unlikely to be resolved simply from changes to interest rates.
A strong economy
Taiwan’s inflation is driven by a number of factors – the most obvious being bottlenecks and delays in the global supply chain. This is what is primarily driving inflation across the globe. But there is another driver of inflation that is usually overlooked. Bittersweet as it may be, the strength of Taiwan’s economy and growing demand for Taiwan-made goods and services are also driving inflation. Since more people started working and living more at home, there is unprecedented demand for personal electronics, at-home computers, and video games filled with Taiwanese technology seen around the world.
Taiwan’s economy grew over 6 percent last year–the fastest since 2010–in part thanks to increased demand. Exports have continued to rise for 18 consecutive months, with the value of exports having skyrocketed by almost 25 percent. While Taiwan’s economic growth might slow in 2022 as global demand for electronics slows, GDP is still expected to grow anywhere between 2.6 percent and 4.2 percent. This would be on-par with other advanced economies. According to The World Bank, the US is expected to grow 3.7 percent this year, with the Eurozone at 4.2 percent, and Japan at 2.9 percent.
Economic growth usually translates into wage growth, and wage growth can lead to inflation as well. Average wages in Taiwan increased 1.5 percent in 2020 and 1.9 percent in 2021, and monthly wage growth has been increasing recently. Regular wages increased 2.2 percent in October and 2.3 percent in November compared with this time in 2020. As a result, households and consumers have more disposable income they can spend, meaning companies need to increase their prices in order to be able to produce more goods to sell. What would be a problem would be if Taiwan were seeing inflation without seeing similar wage growth. This would mean consumers could afford fewer things and would potentially have to tap into their savings. Thankfully, this has not been the case thus far.
Domestically, Taiwan’s economy is in a good position so long as there are not too many global and regional disruptions–whether in the form of inclement weather, natural disasters, new COVID variants that may lead to new lockdowns, or interest rate changes in the US and other major economies. Inflation in Taiwan looks to be controllable at this point, meaning it is neither rising too much, nor too quickly. While global demand for personal electronics will likely cool down in 2022, Taiwan is still in a position to see positive economic growth this year. Wage growth will likely continue as well, offsetting any increase in consumer prices.
The main point: Moderate inflation (1 percent to 2 percent) in Taiwan will likely continue in 2022. This should be manageable for policymakers so long as wage growth can continue to keep pace.
Riley Walters is a senior non-resident fellow at the Global Taiwan Institute and deputy director of the Japan Chair at Hudson Institute.
This article originally published by Global Taiwan Institute Vol. 7, Issue 3, February 9, 2022, Global Taiwan Brief.