Taiwan's headline inflation slowed to 0.33% in December

Inflation pressure stays ahead.

According to BofA Merrill Lynch Global Research report, Taiwan's headline inflation slowed to +0.33% yoy in December, from +0.67% yoy in November, surprising the market on the downside.

Core inflation rose to +0.21% yoy in December, after rising +0.20% yoy last month. After seasonal adjustment, CPI increased by +0.15% month-on-month in December.

Here's more:

Overall headline inflation was contained in 2013, averaging +0.8% yoy, much lower than +1.9% yoy in 2012 and +1.4% yoy in 2011.

Looking ahead, inflation pressure will probably remain low, in our view, averaging 1.2% yoy in 2014, leading the Central Bank of China (Taiwan) to keep the policy rate on hold for at least the first few months of the year to support GDP growth.

In addition, the lackluster labor market will probably help by keeping wages and domestic price pressures relatively muted. Besides, rising property prices in Taiwan are not translating into rising rental costs, unlike other Asian countries that are battling asset price inflation due to global central bank easing.

In our view, the CBC may resume its rate normalization scheme by hiking once (probably 12.5bp) in 2Q14, if there are more noticeable signs of a broad-based pick-up in Taiwan's economic performance.

In December, food costs overall increased by 1.36% yoy as the surging fruit (+7.4%) and aquatic product prices (+6.0%) were offset by slowing vegetable (-7.1%) and egg prices (-6.6%). Housing costs increased 0.8% yoy, while clothing (-2.7%) and transportation expenses (-0.7%) fell.

In particular, the garment prices dropped 2.4% yoy despite the seasonal pick up in fall and winter, supporting our belief of anemic private consumption momentum.

Amid lingering uncertainties and a grim employment outlook, we continue to expect consumer behavior to remain prudent in 1H14 and we expect any type of rebound in consumption in the next few quarters to be capped.