Taiwan's CPI inflation forecast to fall to 2% range

CPI numbers should continue to fall towards the 1% level in the months ahead, says DBS.

DBS Group Research noted:

September inflation data are due tomorrow. CPI inflation is expected to fall to the 2% range from the peak of 3.5% in August.

According to the information from the Council of Agriculture, vegetable prices receded broadly and significantly in September after surging 28% MoM in August, as weather conditions improved and agricultural supply recovered. The pullback in food prices should help to lower CPI growth (MoM) by 0.3-0.4ppt in September.

The concerns about imported inflation resulting from US QE3 have also eased to a degree. Global commodity prices including oil prices corrected downwards in late-September after a temporary rise boosted by QE3.

Meanwhile, the Taiwanese government recently has decided to postpone the second-phase of electricity price hikes to next year (originally scheduled for Dec12).

Demand-driven inflation is no worry, in light of stagnant economic growth and the deterioration in the output gap. The hike in monthly minimum wages (1.4% as proposed by the Council of Labor Affairs in August) will be delayed, until GDP growth returns to 3% for two consecutive quarters or the unemployment rate drops below 4%.

Given the weakness in demand-pull inflation, easing concerns about imported inflation, and the predicted slowdown in food prices, CPI numbers should continue to fall towards the 1% level in the months ahead. As inflation eases, market attention will refocus on growth.

On this front, the leading composite index continued to drop in August (-0.1% MoM sa). Export orders, semiconductor book-to-bill ratio, machinery imports and building permits for construction broadly deteriorated.

Meanwhile, manufacturing PMI fell to only 45.6 in September, a similar level as witnessed in 3Q11/4Q11, when the economy slipped into a technical recession due to the European debt crisis. It now appears that GDP growth in 3Q12 will be much weaker than the 3.5% QoQ saar in 2Q12.

The disappointment in growth coupled with the slowdown in inflation could once again fuel market talk about monetary easing in the upcoming months.