Unanticipated Impact of Taiwan’s New Workweek Rules

Inflation in Taiwan rises in December and may continue 

According to recent changes in the Labor Standards Act effected by the Taiwanese Cabinet, employers are required to provide workers with a mandatory “one fixed day off and one flexible rest day.” This means that employees will get two days off every week during the realization of the 40-hour workweek policy. At the same time, seven public holidays have been reduced.

Inflation in Taiwan, as measured by the CPI (consumer price index), rose 1.7% in December on a year-on-year basis. In November, inflation had risen 2% annually. Meanwhile, core inflation rose 0.8% in the final month of 2016.

Due to increased labor costs resulting from the aforementioned change to workweek rules, some companies in the food and transportation service arena said that they plan to increase their rates. This is expected to further rises in inflation, all other things remaining the same.

In the meantime, the reason for the recent rises in inflation in the month December was the rise in food prices. Vegetable prices were up 16.8% in the month annually while prices of fruit rose 15.2%. The rise in prices of seafood and meat was not as sharp as in vegetables and fruit, but they still rose by 5.3% and 2% respectively.

The decline in prices of eggs by 9.1% and in prices of water, electricity and gas supply by 8.3% kept a further rise in inflation in check.

Inflation rises to a four year high in 2016

For 2016, data from DGBAS (Directorate-General of Budget, Accounting and Statistics) showed that inflation rose 1.4%. This was the quickest pace of rise in four years since inflation finished 2012 up 1.9%.

Inflation rose last year on the back of a surge in vegetable and fruit prices by 22.5% and 18.8% respectively. This increase in vegetable and fruit prices was the largest in 11 years. Meanwhile, core inflation, which strips out prices of vegetables, fruits, and energy, was up just 0.84%.

A DGBAS official estimated that CPI may increase by 0.3 percentage points in 2017 on a year-on-year basis due to the pass-through of increase in labor costs.

A rise in food prices may impact spending on discretionary items if the rise is not proportional to an increase in wages. Equity investors in Taiwan (EWT) (FTW) would need to consider other aspects on Taiwan’s economy like exports before determining a rebalancing of their exposure to Taiwan-focused ETFs.