The likely effects of the energy price hikes

STORES SHOULD NOT raise the prices of their products, Minister of Economic Affairs Wang Mei-hua (王美花) said in anticipation of a rise in commodity prices triggered by the electricity rate increase next month.

This was surely a good statement; it would be great if all industries and businesses could listen to the minister’s words and meet her expectation by creating a peaceful and happy country.

However, this is likely to fall short of her expectations.

Before next month even arrives, the famous Japanese ramen restaurant chain Ichiran already announced that it would raise the price of its noodles.

Theoretically, if energy cost accounts for 10 percent of the total production cost of a product, then a 10 percent electricity price hike would only increase the total production cost by 1 percent.

However, this is a purely mathematical analysis and is not the case in practice.

Experience tells us that an increase in fuel and electricity prices would lead to a price hike in everything, because fuel and electricity prices serve as price indicators. There are three potential scenarios below:

First, the prices of energyrelated products would certainly go up.

However, the rate of increase is not only based on the electricity price hike, but also on the cumulative effect of changes in the production chain as a whole.

‘Hopefuly the government keeps a strict eye on the situation. ’

Upstream and midstream businesses accumulate or even add the costs of raw materials, energy and labor, and then pass them on to the downstream businesses.

Simply put, a bakery would not only consider the electricity costs of baking, but also the raw materials needed, such as flour, eggs and even packaging materials, the prices of which all go up.

As a result, consumers are left to suffer in silence, as all prices increase.

Second, businesses not directly affected by electricity costs, such as the parking lots of Taiwan High Speed Rail stations, would also have to raise prices, due to the increase in its operators’ expenditures.

The consideration of operators in raising their prices is not an increase in direct production costs, but the need to satisfy their livelihood and maintain their operational needs.

Even the prices of fruit and vegetables might have to go up, because farmers have to make a living too. When their home electricity bills go up, they would of course raise the prices of the produce they sell.

Third, as for socio-psychological factors, the public perception would be that if the government takes the lead in raising prices, industry would follow suit.

When public transportation fares go up, it is more likely that this would have a significant impact on overall price hikes in the economy.

If a price hike is reasonable, the public has no choice but to accept it.

Still, hopefuly the government keeps a strict eye on the situation and those taking advantage of the opportunity to inflate their prices, so as to minimize the pain felt by the public due to rising electricity rates.