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Consumer Prices

Everything's Going Up... But What's Really Going On?


Oil, milk, instant noodles... They all seem to have gone up overnight and elevated the cost of living. But are consumer prices in Taiwan really on the rise?



Everything's Going Up... But What's Really Going On?

By Sara Wu, Jerry Lai
From CommonWealth Magazine (vol. 377 )

For one long-time Taipei resident, the time had come to sell the house she owned in Hualian, on Taiwan’s east coast. She cleaned the building thoroughly in the sweltering June heat, filling black plastic bags with garbage and unwanted items and then stacking them outside for the local cleanup unit to collect. Before the bags were taken away, the owner discovered a small woman outside the door ruffling through the bags and shouted, “What are you doing?”

“I take it these are things you don’t want. I’ll help you sort them and you can leave me whatever items are useful,” said this 150-cm-tall woman of Vietnamese origin with restless black eyes, who was as tough as any man.

The owner of the building agreed to the proposition. She helped clean up, but left the useful items to her visitor. After the Vietnamese woman finished sorting through the clothes left behind, her eyes turned to the refrigerator.

“Can you give me this refrigerator?” the woman wanted to know. Every 15 minutes it was something else, and within three hours, the gas stove, television cabinet, and rattan furniture were all on their way out.

As she was about to leave, the Vietnamese woman said, “The garbage truck just came by. The driver wouldn’t take the big items unless I paid him NT$200. I gave him the money, so you owe me NT$200.” The owner, who had just given away all her old furniture, was dumbfounded by the request and thought to herself, “That woman is as hard as nails!” But it was only by being so single-minded that the woman had been able to survive in the lowest stratum of society in a foreign land.

Not many people would have cared about the NT$200, but the Vietnamese woman did.

In 2005, average disposable household income in HualianCounty ranked fourth lowest among Taiwan’s 23 counties and cities. In 11 of the island’s 23 cities and counties, average household disposable income levels actually fell in 2006 compared to the year before, and the decline was felt in both agricultural and industrial areas.

“When commodity prices go up, the impact is not felt across the board. The hardest hit are those in the bottom 10 percent of society who can barely make ends meet,” says former NationalTaiwanUniversity president and noted economist Dr. Chen Sun.

In 2005, the average disposable income of the bottom 20 percent of households in Taiwan was NT$298,000, a monthly average of NT$25,000 and lower than the NT$315,000 the poorest 20 percent averaged in 2000. These households are particularly vulnerable to rises in the costs of daily necessities.

Gasoline prices have increased the most, with 95 octane unleaded gasoline nearly breaking the NT$30 per liter barrier at the end of July.

“I used to get change on NT$1,000. Now it’s shot up to NT$1,500,” said an owner of a 2000cc vehicle, explaining how much more it costs today to fill up the tank.

Confusion Over Rising Commodity Prices

But are prices really on the rise?

The Cabinet-level Directorate General for Budgeting, Accounting and Statistics (DGBAS) announced that Taiwan’s consumer price index rose at an annual rate of 0.61 percent for the first half of 2007, showing that prices were steady. The Chung-Hua Institution for Economic Research (CIER) estimates that the Consumer Price Index (CPI) will rise 2.1 percent in the third quarter and 2.0 percent in the final quarter of 2007.

“Prices are still fairly stable,” said CIERCenter for Economic Forecasting director Wang Lee-rong.

But a closer look at underlying factors leads to different interpretations of what is really happening:

1. Wholesale prices are soaring while retail prices are flat, a sign that producers cannot easily pass along higher costs to the consumer. The wholesale price index reached a 10-year high in the first half of the year, rising at an annual rate of 7.12 percent compared to the 0.61 percent rise in the CPI over the same period (Table 1).

“This wave of agricultural and industrial material price increases has been very hard on manufacturers,” the DGBAS’s Wu Chao-ming told reporters.

2. The rise in prices has been steady and moderate, but has affected many different items. The CPI may have only increased 0.61 percent for the first half of the year, but out of the basket of 389 goods tracked by the DGBAS, the prices of 209 items went up, so consumers still felt the impact. (Table 2)

3. The import price index has soared. Global inflation is catching up with Taiwan, as international crude oil prices and the costs of imported goods and raw materials have skyrocketed. Crude oil prices have repeatedly set historical highs over the past year, with North Sea Brent crude breaking new ground at US$79.53 per barrel on July 13. Under a floating price mechanism formally introduced by the Ministry of Economic Affairs at the beginning of the year, CPC Corporation, Taiwan’s prices at the pump have been adjusted on a weekly basis according to fluctuations in international crude prices.

In terms of commodity prices, corn, wheat and soybeans have risen 40 percent, 57 percent and 43 percent respectively over the past year. Food prices have risen 23 percent, according to IMF statistics, and the United Nations has warned that there is not enough grain to feed the world (Table 3).

Soaring global commodity prices have led to higher prices for imported commodities in Taiwan. The biggest spike has come in base metals, with prices surging 32 percent, followed by animal and vegetable products and related prepared foods, where prices have risen 20 percent (Table 4). Feeling the pinch of higher raw material costs, local food prices have risen. Uni-President instant noodles have gone up 30 percent in the last year, and its milk has risen from NT$45 to NT$53, while Green Giant corn is up 10 percent, and Xiao-Mei ice cream is 16 percent higher than it was last July.

Prices Aren’t the Problem – Falling Incomes Are

According to a report by Lausanne, Switzerland-based IMD Business School, Taiwan’s metropolitan areas had the 17th highest price index among cities in more than 140 countries. But while prices may seem high, the growth rate of Taiwan’s consumer price index was relatively flat compared to CPI growth in other countries.

In fact, although the prices of oil and imported commodities have risen, Taiwan’s price levels are modest when benchmarked against the international community. Fuel prices, for example, are lower than in other Asian countries (Table 5). And even if prices are on the upswing, the net rise has been mitigated by substitutes found for more expensive imported commodities. Economists and research institutes contend that Taiwan does not have inflation concerns. So why is the average consumer feeling the pinch?

“Our problems today are not about prices. The real problems are economic growth and the distribution of income,” said Liang Chi-yuan, a research fellow in Academia Sinica’s Institute of Economics.

The concept of “relative deprivation” perhaps explains the complaints over a seemingly mild increase in the cost of living. The concept describes the strong feeling of deprivation people feel when a difference exists between what they believe they deserve or are entitled to and what their actual situation is. The highest levels of discontent come not when individuals are poor, but rather when they have lost ground financially because of economic and social upheavals. The most disgruntled communities are not in poor areas, but in areas with the widest wealth gaps. The feeling of deprivation results when expectations surpass reality.

Whether relative deprivation exists in Taiwan can be felt through certain comparisons:

1. Comparing one’s past to the present: Income growth is less than it used to be while prices are on the rise. Academia Sinica’s Liang argues that today’s malaise results primarily from the stagnant incomes of average Taiwan residents. Over the past decade, salary growth has declined, from 4.89 percent in 1997 to an estimated 1.29 percent this year (Table 6).

2. Comparing one’s lot to society:A bigger disparity exists between rich and poor. The disposable household income of the country’s wealthiest 20 percent of households was 6.04 times higher than that of the bottom 20 percent in 2005, compared to 5.55 times higher in 2000, reflecting a widening gap in income distribution in Taiwan between the highest and lowest income earners.

3. Comparing one’s lot to the international community: Taiwan’s economic growth rate is lower than that of other countries and lags behind historical levels.

Academia Sinica academician Yu Tzong-shian wrote in the CIER publication Economic Outlook Bimonthly that the middle class is shrinking and most people are losing ground financially, a clear indication, he contended, that Taiwan’s economy is on the decline relative to its own performance historically and that of other countries.

In the first quarter of 2007, Taiwan’s economic growth rate exceeded only that of South Korea among the Four Little Dragons of East Asia (which also include Singapore and Hong Kong), while lagging behind the growth rates of the six ASEAN countries and the four BRICs (Brazil, Russia, India and China.)

Figures for the past 10 years tell two contrasting economic tales. From 1996 to 2000, Taiwan’s growth rate averaged 5.75 percent – the highest among the Four Little Dragons. But growth from 2001 to 2005 averaged only 3.13 percent, trailing the growth rates generated in Singapore, South Korea and Hong Kong.

“The economy is declining in ‘relative’ terms. Statistics show Taiwan’s economy seems to be growing weaker,” Yu wrote.

Many consumers see themselves falling behind their own expectations, their peers, and residents of other countries. In addition, wage and income growth is relative static. These factors have caused private consumption demand to tail off as well. Yu said that from 2001 to 2005, the rate of private consumption growth averaged 2.67 percent, a substantial decline from the 7.62 percent seen between 1996 and 2000 (Table 7).

With Consumption Weak, Prices Stay Put

Private consumption in 2006 grew a mere 0.84 percent, and has improved only slightly to 1.69 percent this year, even though the worst of the credit- and cash-card debt crisis has passed.

Many local manufacturers and suppliers, who have been hit by the rising cost of imported materials and goods, declined to be interviewed for this article. They would only say, “We’ve raised the prices of some items to reflect our costs, but we’re closely monitoring the reaction of consumers.”

Allan Tien, national expansion director for retail giant Carrefour, suggests increasing prices would only be counterproductive. “Suppliers are biting the bullet to avoid raising prices; otherwise, they would force consumers to try other brands,” he notes.

Higher prices are not simply a problem that affects daily life. They have also become a social issue. With legislative elections scheduled for the end of this year and presidential elections set for early next year, even the president and premier are closely following the situation. The Ministry of Economic Affairs and the Central Bank of the Republic of China (Taiwan) have had no choice but to join in the effort to restrain inflation.

Only the Tip of the Iceberg

Rising prices also exacerbate the “M” trend in society, which describes a shrinking middle class and a growing concentration of the population in either high- or, more often, low-income groupings. NationalTaiwanUniversity’s EMBA program held its graduation ceremony at the end of July and invited NationalTaiwanUniversityHospital superintendent Fang-yue Lin to be its guest speaker. Addressing 130 high-level supervisors, he stressed, “A society cannot exist in a vacuum. If talented elites like those sitting before me cannot help the disadvantaged in society, then society’s problems will ultimately affect everyone.” He argued that the meaning of life was to give back to society, not to pursue career advancement or financial success.

Many economists believe that the outcry over rising prices is simply the tip of the iceberg when it comes to the impact of unevenly distributed incomes. The real problem that society will have to face is not higher prices, but the relative deprivation caused by the widening income gap.

Translated from the Chinese by Luke Sabatier

Chinese Version: 「漲」勢欺人 問題不在物價?