Taiwan's consumer prices posted their biggest monthly increase in two years in August, as faster economic growth helped fuel a rise in the cost of food and medicine.

The seasonally adjusted consumer price index, the most closely watched inflation measure, rose 1.65 per cent in August from July, the first gain in three months, said the Directorate General of Budget, Accounting and Statistics.

The unadjusted CPI rose 1.47 per cent on month to 103.33 points, the sharpest rise since June 1997. It gained 1.14 per cent from a year ago.

While the jump surprised economists -- most expected prices to be little changed from the previous month -- the figures are still in line with the government's forecast for a 0.5 per cent increase this year and 0.9 per cent increase this quarter.

The rebound should help ease concerns that a slide in prices might cause consumers to delay purchases in hopes that goods would get cheaper.

Falling prices can also make banks less willing to lend, as they can batter company earnings and make debt more difficult to repay.

After price declines in recent months, "consumers were not going to spend like crazy", said Leslie Khoo, an economist at Thomson Global Markets in Singapore.

At the same time, the increase was not enough to spark concern over rapidly rising prices. The agency's deputy director, Koo Pin-chen, said the figures show inflation is "not a problem now".

The CPI increase should also give the central bank more flexibility in setting monetary policy since real interest rates are reduced when prices rise rather than fall. -- Bloomberg

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