The Year of the Rat has just begun, and according to legend this is a good omen for getting rich. Be that as it may, owners and managers of businesses large and small are worrying over the poor state of the economy, and consumers are alarmed over one wave of price rises after another. Just how great is inflation pressure in Taiwan?

In early January, a certain discount store was holding its customary anniversary sale. For those short 10 days, customers flooded in and the whole of the many thousands of square feet of the store's area was jam-packed with people. A conspicuous sign in the store warned shoppers not to bring children in for fear of losing them. Among the crowds one could see many fashionably dressed office workers who had skipped work to come and snap up the bargains.

Outside the store, housewives braving the cold wind queued the length of the block to buy rice and toilet paper which were on sale at the super-low price of NT$55 a pack in limited quantities during limited hours. Some even came every day.

Where are the bargains?

"I must find the best prices!"--in a time of economic austerity, these words express the thoughts of many a consumer. In the hectic buying spree during the clearance sales in the run-up to the Chinese New Year, amid the sea of red and yellow banners announcing "70% Off," "Half Price," "Year's End Reward," or "New Year Special Offers" on clothes, shoes, accessories, and everyday household goods, on the one hand shoppers find it hard to resist the bargains all around them, and think: "Prices will be going up after the New Year--better buy quickly!" But on the other hand they hesitate: "Economic prospects aren't so good, and it will probably be tougher and tougher to get by--better save our money!" So will the Year of the Rat bring rising prices or falling prices? And how will price trends compare with income trends? Consumers are completely at a loss.

"At the moment price levels are still quite reasonable, and there should be no worries about inflation for the time being"--for many economists, the rise of only 3.68% in the consumer price index over the whole of last year, and the fall in the inflation rate this January due to the pre-Chinese-New-Year sales, are evidence that the public's worries are needless.

But these figures cannot alter the fact that from the beginning of 1996, before they even had time to change their calendars, ordinary citizens were faced with bad news in the form of a succession of price rises: from 1 January, the ROC's two largest newspapers--the China Times and the United Daily News--put up their prices by 50%, the Council of Agriculture approved a 20% upward adjustment in the price of wheat flour, domestic air fares went up, and so on. Other hints of a general trend of rising prices include rumors of a coming hike in cable TV charges, from the present NT$600 to NT$1000 per month, and rice and gas price rises in the pipeline. The water shortage which grows more acute year by year also suggests that an era of high water charges is finally imminent. It looks as if this year, any thoughts of leading a relaxed and prosperous life are over-optimistic.

An age of high prices?

There is a reason for the discrepancy between experts' theories and the impression which consumers have derived from their personal experience.

In the years since 1989, when the "money game" of stock and property speculation was at its height, the nightmare of rising prices has been repeated every year. This has prompted the ironic comment that "Taiwan is up to its neck in money, but up to its eyes in prices." Never mind that economists believe moderate price inflation is an important stimulus for maintaining economic growth, and annual consumer price inflation of 3-4% is "tolerable"--although the inflation rate of around 4% p.a. over recent years only counts as mild inflation, consumers compare it with the period of many years up to 1988 during which inflation stayed below 2%, and complain loudly that it is more than they can bear.

"For the past few years, with the economic boom led by the stock and property markets, everyone had plenty of opportunities to earn money, so they were tolerant of higher prices. But in the last two years this situation has turned around, and it's not surprising if consumers' sensitivities are particularly acute," explains research fellow Liu Shou-hsiang of the Chung-Hua Institution for Economic Research.

Looking back, the most recent series of worrying price hikes is a continuation of the process of the past two years. Do you remember the summer of the year before last, when Taiwan was hit by six typhoons in a row? Vegetable prices rocketed--a white cabbage cost over NT$100--and from August to October consumer price inflation hovered at record levels of 5-7%. Housewives going to the vegetable market really did feel the anguish and alarm of being faced with prices they simply couldn't afford. Then, last year began with an even larger wave of across-the-board price rises. This set the scene for the annual inflation rate to once again exceed the 4% warning level in the first half of last year.

A worldwide trend

"Starting from late 1994, as the global economy recovered, demand increased greatly, and this brought sharp rises in the international prices of some agricultural and industrial raw materials, including petrochemical feedstocks, textile fibers, paper pulp, grains, basic metals and so on. Price rises in Taiwan are part of a global chain reaction," says Liu Fang-jung, a specialist researching prices at the Council for Economic Planning and Development.

Why should the prices of so many different raw materials all have gone up at the same time? There are many reasons. For instance, the production of some of them had fallen in the previous few years when the global economy was slack, some were affected by climatic factors, and some were hit by breakdowns at large international plants which reduced their capacity. When downstream processors around the world placed orders after the quick upturn in the economy, demand unexpectedly outstripped supply for a time, and competition between buyers sent prices spiralling upward. Inevitably, the price rises were also bolstered by such factors as speculation in international futures markets, and investors at large blindly pursuing high prices in the expectation of continued price rises.

Whether or not the reasons behind the price rises were rational or reasonable, international prices for bulk commodities surged, and a country like Taiwan with few natural resources, which has to rely on imports for so many things, could not avoid the impact. For instance, Taiwan relies 100% on imports for soya beans. When there were rumors that the international price of soya beans was about to go up, the prices of animal feeds and vegetable oils within the ROC rose, oblivious to any objections. In the first three quarters of last year, the imported goods price index rose by a massive 11.6%, and the wholesale price index, which had stayed level for many years, also rose 7.9%. Both touched levels not seen for a decade.

The effect of international factors did not end there. When the value of the Japanese Yen appreciated last year, increased prices were reported for electrical appliances, stationery and gifts imported from Japan. To cap it all, with the draw of the Yen, Taiwan's live pigs were all exported to Japan, and the price of pigs in the ROC peaked in August of last year at an astronomical NT$6700 per 100 kg, far above the average price in 1994 of NT$5000. Although Japan later imposed limits, it was not until pig farmers in Taiwan stepped up production to take advantage of the strong market that the price gradually softened.

Quick to rise, slow to fall

The international rise in agricultural and industrial raw materials prices in response to the economic upturn was only short-term, since manufacturers very quickly added capacity and increased supply. From the fourth quarter of last year, there was a marked slowdown of growth in the international economy, and as demand fell the prices of various materials which had previously rocketed quietly came down again. Middlemen who had cornered large stocks at high prices were left holding the baby.

"As long as petroleum doesn't go up, there's no reason for steep rises in other prices," opines Liu Fang-jung. At present, she says, there is no conflict in the Middle East and the supply of crude oil is stable, so even if prices for various raw materials go off track temporarily, they are bound to come back into line in the end, and will not get out of control.

Meanwhile, Professor Hou Chia-chu of the economics department at Soochow University says that the only commodity prices likely to see long-term upward trends are those for grains. Following abnormal weather worldwide and the loss of agricultural land to industrial use, predictions of a coming worldwide grain shortage have long been a hot topic. Grain production in mainland China has fallen, and this winter's extreme cold weather in America brought blizzards even to the beaches of Florida, usually known as a place people go to avoid the winter cold. As a result there is serious concern about this summer's wheat and citrus harvests. For Taiwan, which relies entirely on imported wheat, the domestic price of flour looks set to rise again.

However, whether raw materials prices continue to rise or whether they fall again, the final consumer prices which took the opportunity to rise along with them are unlikely to come down again so easily, for they are far more elastic upwards than down. For instance, last year, with the rise in international cotton prices, men's underwear prices rose by as much as 50%; today, cotton prices have returned to their previous levels, but underwear is as dear as ever.

"Manufacturers really are unwilling to lower their prices," says Amy Chuang, managing director of marketing consultants Field Force Group Market Research Company, observing that price not only represents cash value, but also reflects the sense of value the manufacturer wishes to impart as part of his brand strategy. Thus directly reducing recommended prices is evidently not a good way to instil a sense of a product's value. Furthermore, if one does lower prices, "it makes it very difficult to rebuild brand image later."

Special offers and piggyback price hikes

Nevertheless, success or failure in the market place counts for more than such questions of image. If sales are not as good as expected after a price rise, manufacturers will not directly reduce prices, but they are sure to use all kinds of promotional discounts to attract customers. From the second quarter of last year, the domestic economy slowed rapidly and this put a heavy brake on consumption. Many manufacturers' costs had risen and they were on the verge of raising prices, but when they saw that the market was in trouble they immediately cancelled the impending rises, or even made price reductions "disguised" as promotional discounts (see box, "The Forces Fuelling Inflation").

For instance, last year the price of paper facial tissues rose by 20%, from a price in large supermarkets of around NT$100 for a pack of five boxes plus one free, to NT$130 for five boxes. But the new high prices did not last even so much as three months, for the international price of paper pulp soon fell substantially, and there was excessive supply from local manufacturers. Retailers discovered that low-price tissues made an excellent bait to attract customers into stores, and pressed household paper goods manufacturers for discounts. The result of this intense competition was that although the recommended price of tissues remained high, one could see special offer packs everywhere at a "disguised" reduced price of NT$85 per pack. Customers leaving discount stores or supermarkets carrying packs of tissues, or people squeezing onto buses with them, became a common sight.

Do disguised price reductions in the form of promotional campaigns lead to giving "short measure"? Should a box of paper tissues actually contain 200 sheets, 150 sheets or 130 sheets? This involves a lot of mystery and a good portion of luck. The public relations officer at one large local manufacturer of household paper goods reveals that for certain promotions, to avoid selling at a loss, manufacturers really do respond by repacking in smaller quantities. But for some other promotions, they may provide real, full-measure packs as loss-leaders in order to raise brand awareness and grab market share.

If even the paper tissues we use every day have to go through such market psychological warfare with all its ups and downs, truths and falsehoods, then of course when it comes to other consumer goods with higher unit costs, every trick in the book comes into play. So in plain dollar terms, just how much have prices actually risen? Never mind that every consumer's experience is different, this question even baffles the experts.

Apart from "downward inelasticity," another phenomenon associated with raw material prices going up is "piggyback" price hikes. For instance, from late last year to early this year, the price of wheat flour rose by some 20%. This may sound a lot, but how many cents worth of flour does it take to make a little bread roll the size of the palm of one's hand, which formerly sold for NT$15? Yet bakers couldn't let slip this opportunity for a price rise worthy of the name, so if the rolls didn't shrink in size then they jumped to NT$18.

When asked why the price had gone up so much, one bakery owner said that his rent and the bakers' wages had gone up long before, but for fear of offending customers and giving them the feeling that he was always putting his prices up, he had been holding them down. This rise in flour prices was a heaven-sent opportunity to add in all the costs he had not so far been able to pass on, and even--he adds as if it were the most natural thing in the world--"put in a rise for the coming year ahead of time, so that I won't have to worry about raising prices again this year!"

Farm produce--the price piston

Last year saw great volatility in international prices, but fortunately Taiwan got help from "on high": the weather last year was good, and with no troublesome typhoons--usually the biggest disruptive factor--farm produce prices stayed level. In particular, vegetables were far cheaper than the year before last. But despite the good weather, we still saw the extraordinary spectacle of rocketing prices for garlic. Garlic leapt from NT$80 per Taiwanese pound (600g) to over NT$200, and in dumpling parlors one no longer saw garlic provided on tables for patrons to take at will. Ginger also ceased to be an item which greengrocers threw in as a goodwill gift: even the smallest piece began to cost NT$30- 40. No wonder someone joked that spring onions, ginger and garlic should be added to the list of seven household essentials: kindling, rice, oil, salt, soya sauce, vinegar and tea.

"The scale of the ROC domestic market in agricultural produce is very small, and it is subject to many protectionist policies. The result of the lack of free competition is that the market is prone to being monopolized and controlled by certain people for their own ends," says Hou Chia-chu, who identifies the various structural factors which influence the price of farm produce in Taiwan: the production and distribution system is not sufficiently healthy or open, and produce passes through the hands of many profiteering middlemen before it reaches the consumer. This is what lies behind the strange phenomenon of shoppers having to pay prices many times higher than those paid to the farmers. Although at each crisis in which the price of some item of produce skyrockets, the supervisory authority responds by releasing emergency stocks from its public stockpile or by allowing special imports, this help always comes too late. The recent garlic episode is a case in point.

Deliberate manipulation is a factor which magnifies price volatility, but it is the inherently unhealthy state of agriculture in the ROC--mainly the fact that production is mostly small scale and unplanned--which makes it easy for production and sales to get out of balance. The impression from the year before last that "vegetables are dearer than meat" has barely faded, but this winter quite the opposite has been true: overproduction has made vegetable prices slump, with angry vegetable growers digging their vegetables back into the fields to let them rot down as manure.

As one can imagine, "if farmers get no return for their effort and investment, and are no longer willing to grow vegetables, the supply will fall further. If there are typhoons this summer, vegetable prices are sure to shoot up, and the old cycle of yo-yoing prices will start all over again," predicts Liu Fang- jung.

Naturally the solution is to reduce protectionist policies to make the market freer and more international. One example is Red Delicious apples, on which import restrictions were lifted under strong pressure from the USA. The price went down to below NT$10 each, and the taste of apples is no longer a luxury. To be sure, US fruit growers earn money from Taiwan, but the people who benefit most are Taiwan's consumers. In future, as Taiwan strives to gain entry to the World Trade Organization, the pace of liberalization and internationalization will only increase, and this should have a positive effect on stabilizing farm produce prices.

The gap with Hong Kong narrows

A food supply is the most basic of human needs, and farm produce is the last bastion of protectionism in the ROC; it is also the segment most prone to sensitive price fluctuations. This situation is not unique to Taiwan, but is common throughout the world. Fortunately, except for agricultural produce, most household items, domestic appliances, cosmetics and so on were thrown open to free competition earlier, and so have already entered an era of more stable prices in line with those in advanced countries worldwide. Briton Dennis Casey, managing director of drugstore chain Watson's The Chemist Taiwan, and a long-time resident in the Asia-Pacific region, observes that a few years ago prices in Taiwan were almost as high as in Japan. But with the fast opening of Taiwan's markets and free competition, "the most efficient and modern international retailers are all setting up in Taiwan, bringing with them their international experience and vision, and seeking out low- price, high-quality products from all over the world to supply to local consumers."

Taking Watson's as an example, of its many consumer goods such as toiletries, cosmetics, ornaments and so on, not only have very few gone up in price over the last few years, many have actually reached new low price levels, especially since many European manufacturers who in the past were frustrated by a lack of distribution channels through which to reach the Taiwanese market, now sometimes put on exploratory promotions at extremely large discounts in order to develop this new market. One example is liquid soap imported from Britain, which is on sale in Taiwan at a lower price than in Britain itself.

"Taiwan's basic price levels used to be rather high, but over the last few years things have improved. Meanwhile Hong Kong has suffered severe inflation in recent years (9% last year), and the price gap between them is getting smaller all the time," says Dennis Casey. He predicts optimistically: "The price of household articles in Taiwan will continue to go down." Not only that, but as consumers learn to keep abreast of new promotions and seek out the discounted products which suit their needs, they will imperceptibly acquire wiser and more rational consuming habits.

Triple-win strategy, wider choices

The price maze is an arena in which all kinds of tangible and intangible forces compete. The three major ones among them are manufacturers, the retail distribution system and consumers. Dennis Casey's words point up a basic change: formerly markets were steered by manufacturers, but today it is the distributors with their own retail outlets--be they high-class department stores, medium and large supermarket chains, convenience stores or discount stores--who hold the reins. "Especially since the rise of large discount stores whose main selling point is low prices, they really have had a very large effect in bringing price levels down," observes Lily Ouyang, managing editor of Consumer Reports Magazine.

Johnson Yeh, administrative division manager for department store group Far Eastern Enterprise's Hyper discount store, believes that whereas the business philosophy of traditional merchants is to try their hardest to "sell at the highest price to bring in the greatest profit," the discounters aim to "stack 'em high and sell 'em cheap," and the way they compete with each other is to "prove their purchasing power and ability by getting the lowest possible prices from manufacturers to pass on to customers, while still making a profit."

During the anniversary sale at the beginning of this year, amid reports of rising rice prices, Johnson Yeh took the opposite tack. He bought rice from rice merchants at low prices in the enormous quantity of "100,000 bags in ten days," and sold it at NT$30-40 below the market price. This cheap rice attracted crowds of buyers and 100,000 bags were sold out in no time. This offer boosted customers' willingness to buy during the anniversary sale, and so can be said to have been a very successful "triple win" strategy.

The scope of the discount store concept is constantly being expanded, from electrical appliances, household articles and fresh foods to Scandinavian furniture and so on. At the end of this January, when a branch of a European hardware, DIY and furniture superstore, advertised as the largest in Taiwan, opened in Taoyuan, it even attracted shoppers to hire buses to visit it, and the enormous crowds were an extraordinary scene.

With intense competition between retailers and an adequate degree of choice, high-income consumers can patronize department stores with attentive service and comfortable surroundings, while ordinary shoppers to whom a price difference of NT$10- 20 is important can go to the discount stores to enjoy low prices.

Reasonable price is in the eye of the shopper

What supermarket chains and discount stores do best is selling large quantities of standardized products, but the small independent shopkeepers one finds along any street, whether they be bakeries or small eateries which make and sell their food fresh and piping hot every day, or fashion boutiques which buy in their stocks in quantities of just a few garments at a time, or labor-intensive beauty parlors and the like, are unlikely to have the economic scale to buy in bulk or the capability to source their goods all over the world. Small shops have higher operating costs, and when there is a silent agreement among them to raise their prices and competition is weak, consumers often just have to put up with it.

"In the market for some goods where there is no choice of lower prices, consumers' best way to protect their interests is to shop around and also to reduce and delay their purchases. This will force merchants with unreasonable prices to lower them," says Lily Ouyang.

Sadly, consumers are generally unmoved by such exhortations, and their ability to counterbalance the other players in the market is very weak. This leaves the Consumers' Foundation and other consumer groups feeling frustrated and powerless. For instance, after street vendors' prices for a fried egg went up from NT$6 to NT$10 and for a pork chop from NT$30 to NT$40, they seemed to have as many customers as before--perhaps because people thought that in any event it's a small amount of money, and certainly cheaper than a restaurant.

"This is not a question of haggling over three or five NT dollars, it's a question of the cost structure, and whether the scale of price rises is reasonable," stresses Lily Ouyang.

When consumers attempt to regain their influence over prices by refusing to buy, manufacturers in fact do respond very sensitively. Li Kuang-jung, manager of Pacific Sogo department store's sales promotion department, cites an example: last year the clothing and accessories market was in a slump, and the fact that there had been an intercalary month during the last lunar year meant that this year's Chinese New Year was not until the second half of February, a full month later than in most years. In this situation manufacturers who operate their own counters in department stores should have been well aware that consumers had not yet received their year's-end bonuses, and were not yet ready to buy their new clothes for the New Year. But to turn their stocks into cash as quickly as possible, some manufacturers still decided to start posting 30% discount notices from the beginning of January, as in previous years. The results were disappointing and in a panic some manufacturers quickly cut their prices further, to 50%.

Compared with previous years, "this year, clothing prices have been discounted quickly and heavily, and consumers can get some real bargains before the lunar New Year," says Li Kuang-jung. As for when the clothing trade will move away from the vicious circle of setting inflated recommended prices and having to rely on discounts to attract consumers, that is another puzzling part of the prices mystery.

"This is the worst of times, and the best of times." Amid rising prices and falling prices, this adage applies to buyers and sellers alike. Whether reasonable prices are indeed possible, is a test for the wisdom of both sides.

When the boss of this small eatery decided to put his prices up, he just pasted the new ones over the old. A rise of NT$3 or 5 may not seem like much, but in percentage term s it's quite a difference.

After the price of local pork shot up and half a pound of spareribs cost NT$70, many housewives turned to imported frozen beef from large supermarkets.

Last year garlic tripled in price, and only came down again after special imports were authorized.

Even before the Chinese New Year, many clothes shops put up posters announcing 70% discounts. But shoppers still stayed away.

In straitened times, every penny counts. The price of toilet paper went up and up in line with the international price of paper pulp, so when supermarkets started putting on special offers, many shoppers stocked up with a whole trolleyfull.

After taxi fares went up last September, the passenger numbers dropped 1 0%, and have still not rebounded. Is the best way to increase revenue to raise prices or to lower them? This is a tough question for people in any business.