Taiwan and China are back together exploring for oil in the Taiwan Straits, according to recent news reports. And United Daily News (UDN), a paper tightly linked to the KMT, reported that Hu of China had invited President-elect Ma to China for talks. The Olympics is going to make a great backdrop to the visit that Ma promised he wouldn’t be making…though KMT officials themselves dismissed such talk. Direct flights aren’t expected until next year. Whatever the inflated expectations of some, reality is expected to move more slowly…

…but not prices. Sticker shock: went to our usual volume retailer the other day, only to find that the bag of wheat flour we used to buy for $38 is now $53. Gasoline is outrageous — we take scooters everywhere now. Imported stuff is skyrocketing — brie I used to enjoy at $99 is now $189, cheap smoked processed cheese from Germany rose from $125 to $165 at the local supermarket. The Central bank said inflation was near 4% in both Feb and March of this year…

One solution to the problem of inflation is to let the NT dollar gain in value. For most of the ROC’s brief existence on Taiwan the NT dollar has been more or less pegged to the US dollar. Indeed, last week Goldman Sachs predicted the NT would continue to rise:

The New Taiwan dollar may advance to an 11-year high in six months as the central bank allows further gains to stem inflation, Goldman Sachs Group Inc said, raising its forecast for the currency.

The NT dollar may strengthen 6.3 percent to NT$28.5, the world’s biggest securities firm said, revising its earlier forecast of NT$30.50. The currency has advanced 6.4 percent in the past three months, the best among 10 most-active currencies in Asia outside Japan.

“The central bank will likely utilize currency appreciation as another policy tool in combating imported inflation,” Goldman’s research team led by London-based Jim O’Neill wrote in a monthly global report received by Bloomberg today. “The interest-rate differential vis-a-vis the US dollar has become more favorable.”

Letting NT rise would be a quick way to increase the purchasing power of Taiwanese and enable locals to feel they have more money in their pockets. It would make imported goods cheaper. The negative side, of course, is that it makes Taiwan goods more expensive in world markets, forcing exporters to slash costs or move. It also has another pernicious effect, noted last week in a long commentary in the Taipei Times:

Even more serious is that when the nation’s currency appreciates against the US dollar, government and private assets denominated in US dollars suffer from exchange loss with their decrease in value.

Inflation may well become the number 1 challenge for the incoming Ma administration, since the current government has announced that price freezes on gas and electricity will be lifted on May 20, the day Ma is sworn in.