Taiwan’s inflation surges to 2% in December

The country’s inflation surprised on the downside as food prices spiked 5%.

DBS forecasts inflation of 1% on average for 2012, compared to 1.4% last year.

Here’s more from DBS:

Taiwan’s CPI inflation surged to 2.0% YoY in December, much higher than market expectations and our projection of low-1%. This was mainly caused by the spike in food prices (5.4% YoY), as vegetable supply was disrupted last month due to rainy weather conditions, and its distorting impact on consumer prices was underestimated by the market.

As the food supply disruption is one off, we are not changing our CPI forecast of 1.0% on average for 2012, compared to 1.4% last year. Core inflation excluding food and fuels, which is largely driven by the demand side forces, tends to lag the economy’s output gap by two quarters.

As aggregate demand has started to weaken from 3Q11, the underlying inflation rate will fall from 1Q12 based on historical patterns. As such, we expect CPI growth to drop
slightly to 0.5-1.0% in 1H12, before recovering in 2H12.

Yesterday’s report also showed that WPI inflation eased to 4.3% YoY in December from 5.3% in the previous month. However, the slowdown was mainly helped by the base effects. In sequential terms, WPI growth remained strong at 6.9% 3M/3M saar.

International crude oil prices currently remain high. The curbing effects on imported inflation stemming from TWD appreciation have also been fading. On a YoY basis, the Taiwan dollar has started to weaken against the US dollar since Dec11.

As a result of the elevated prices of imported raw materials, in combination with the structurally downward trend in the prices of export products that are largely comprised of electronics, the economy’s terms of trade continued to worsen. The pricing power of domestically oriented producers and retailers is also weak, due to the deterioration in domestic demand. Corporate profitability will remain under pressure from the price perspective.