Electricity rates charged by Taiwan Power Co (Taipower) are to rise across the board next month, awaiting an electricity price review committee convened by the Ministry of Economic Affairs this month. How strongly this would affect consumer prices has become a concern for many, including the central bank. Two issues worth paying attention to regarding the upcoming electricity rate hikes are:
First, high power prices tend to create inflationary pressures on other costs of firms and industries, which might end up being passed on to customers.
Second, the hikes could have a chain reaction effect on inflation expectations, likely resulting in a self-perpetuating spiral of rising consumer prices.
Last week, the central bank said that it was much more worried about inflation expectations getting embedded into economic behavior. At a meeting of the legislature’s Finance Committee on Thursday, bank Governor Yang Chin-long (楊金龍) said that if consumer prices grow above the 2 percent threshold for an extended period, inflation expectations would be anchored, making it hard to bring inflation down.
The Directorate-General of Budget, Accounting and Statistics said that a 10 percent hike in electricity rates might push up inflation by 0.12 percentage points annually. This only reflects power prices’ direct effect on the household sector, without taking into account their indirect effect on other sectors of the economy — which refers to the chained interactions between the electricity sector and other sectors.
Suppose that the effect of industrial linkage between the electricity sector and other sectors — despite varying sectoral correlations — is also considered: When there is a hike in electricity rates, overall production costs increase accordingly. Chemical materials, non-metallic mineral products and water supply would see marked increases in prices, followed by textiles, plastic products, accommodation fees, paper products, computers and electronic components, while housekeeping and residential services as well as financial services and investments would see the least increases in prices, analysts said.
Whether a firm would pass the extra financial burden on to consumers or absorb the costs itself could be discussed from two aspects.
The first involves the level of competition a firm faces in its respective market, and the other is related to the firm’s inflation expectations, which is also the most unpredictable factor and is therefore difficult to deal with. Meanwhile, experience shows that firms would begin to pass on the cost increases to consumers in the second month of post-price hikes, with the highest costs in the fourth month, before decreasing in the following months.
Inflation has long been a highly debated subject among politicians, businesspeople and economists. Some say that moderate inflation levels are needed to drive consumption — assuming that higher levels of spending are crucial for economic growth — while others say that rising prices make it harder to save money and that this phenomenon benefits only a few people at the expense of others. However, the history of the world economy has taught us that inflation and inflationary pressure are separated by a thin line of fear and panic amid an outsized expectation of further price rises.
When the expectation mentality spreads, inflationary pressures immediately turn into inflation monsters, impacting economic growth, changing income distributions and causing serious damage to society. At a time when the government is calculating its financial support to Taipower and subsequently the scope of electricity rate hikes, policymakers must not ignore the matter of inflation expectations, because it plays such a critical role in the effective implementation of the central bank’s monetary policy.
Sometimes actual inflation depends on what people expect it to be.
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