Inflation eases; rate cuts seen

The consumer price index (CPI) climbed 1.88 percent in November from a year earlier, the Directorate General of Budget, Accounting and Statistics (DGBAS) said yesterday in Taipei, after increasing 2.39 percent in October. The median estimate of 14 economists surveyed by Bloomberg News was for 2.05 percent. The government forecasts the nation will fall into a recession this year after shrinking in the third quarter for the first time since 2003. Slowing inflation makes it more likely the central bank will cut interest rates at a meeting on Dec. 11, the fifth reduction since September.

“We expect the central bank to cut 25 basis points to 2.5 percent next week,” Tony Phoo, an economist at Standard Chartered Bank in Taipei, said before the report was released. “Policy makers are expected to join the government’s efforts to stimulate growth.”

Phoo said he expects the central bank to lower the rate to 1.75 percent at the end of next year.

Food prices rose 6.94 percent after advancing 5.53 percent in October. Housing costs increased 1.59 percent and the price of transportation fell 5.53 percent. CPC Corp., Taiwan’s state-owned oil refiner, cut gasoline prices for three consecutive weeks in November as crude oil fell from a record US$147.27 on July 11.

Core consumer prices, a category excluding vegetables, fruits, fish and energy, rose 2.40 percent after climbing 2.88 percent in October.

Import prices fell 6.52 percent from a year earlier, while wholesale prices fell 4.95 percent.

In a related story, the DGBAS forecasted next year’s CPI will grow 0.37 percent from this year, stressing that a deflation will not occur.

The statistics bureau pointed out based on the definition given by the International Monetary Fund, deflation happens when a nation’s CPI experiences negative growth for two consecutive years.

According to DGBAS data, this year’s CPI will grow 3.64 percent from last year, while next year’s will be 0.37 percent higher from this year. By definition, Taiwan will not see a deflation, the bureau said.

Some scholars, however, are urging the government to take measures to prevent deflation before it comes. “There are fewer tools to combat deflation than there are for inflation,” said Liang Kuo-yuan, director of Polaris Research Institute. “The most common tool to fight inflation is raising interest rates. Yet for deflation, lowering interest rates usually doesn’t work.”

Besides monetary policies, Liang said fiscal policies may also be used to fight deflation, adding the government is on the right track by issuing consumption vouchers and lowering taxes. The government said earlier this week it will extend the new year holiday by a day to stimulate domestic consumption, stepping up its efforts to revive the economy after approving a plan to give NT$82.9 billion in shopping vouchers. Deflation is usually seen as a vicious cycle — lowered prices will cause businesses to make less and pay less to their workers, who will spend less, driving prices to go down even more.

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