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By Lee Kyung-min
Concerns over inflation are mounting triggered by a steep rise in oil and raw material prices amid growing expectations for an economic recovery, setting the stage for discussions on whether pandemic-induced expansionary policies need to be drawn down.
Some say the current rise in the prices of goods and services does not qualify as inflation ― a general rise in price levels over a period of time ― since it is a temporary phenomenon primarily caused by base effects from the grim conditions in the economic and financial markets over the past year.
But others say "real" inflation is a possibility, driven by an explosive demand for consumption long pent up because of the yearlong economic contraction.
The price increases are certain to lower the purchasing power of households and elevate production costs. Producers can offset their rise in costs by selling products at a higher price, whereas consumers have no way of avoiding soaring living costs other than to reduce spending.
Either way, households and businesses that have barely made it through months of struggling will no longer be able to sustain themselves, a reason why the authorities need to find a way to create a soft landing for small businesses and low-income heavy borrowers unable to quickly repay their loans.
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Raw material, oil prices
Crude oil, copper and steel prices continue to rise. West Texas crude for June delivery traded for $63.37 (71,810 won) a barrel as of Friday (local time), more than double the figure from a year earlier. This is a six-fold increase from $10.01 on April 21 last year, the lowest level since the pandemic began.
Copper prices have risen from $4,371 per ton in March last year to over $10,450 per ton.
Gasoline prices nationwide averaged 1,537 won per liter in the second week of May, up 2.7 won from the previous week. This is the highest since the third week of February last year when the figure was 1,538.49 won. Gasoline prices in Korea have been on the rise for the past 20 consecutive weeks since last November.
Consumer, producer prices
Consumer prices in April were up 2.3 percent from a year earlier, the biggest increase in three years and eight months since August 2017 when the figure was 2.5 percent.
This was the first time in two-and-a-half years that inflation was over the statistically significant 2 percent level since November 2018.
The Producer Price Index stood at 106.85 in March, up 0.9 percent from the previous month and a 3.9 percent year-on-year jump ― the highest in eight years and 10 months since May 2012.
Further increasing the inflationary pressure is the record-high amount of money on the market.
Bank of Korea data show the money supply measured by M2 was 3,313.1 trillion in March alongside M1, up 38.7 trillion won, or 1.2 percent from the previous month. On a year-on-year basis, the jump was 11 percent, the highest increase in 12 years since March 2009 when it rose 11.1 percent.
The M1 metric includes highly liquid financial instruments including cash, checkable deposits and traveler's checks, whereas M2 money supply encompasses M1 plus assets with lower liquidity such as savings, certificates of deposit and money market funds.
The country's household debt reached 1,726 trillion won last year, up 7.9 percent from the previous year and the highest since 2003 when the government began compiling related data.
"Prices of raw materials and oil are under further upward pressure, but it remains to be seen whether this volatility will be sustained," said Jung Kyu-chul, macroeconomic analysis and forecasting director of Korea Development Institute.
Key rate hike
The central bank pointed out the need to maintain "financial stability," an implied way of placing more weight on a key rate hike.
"We should continue paying attention to the accumulation of potential factors that hinder future financial stability, caused by the continued eased monetary policy put in place to weather the pandemic," a member of the bank's seven-member Monetary Policy Committee said at a meeting April 15. "If the spread of the virus slows and the recovery of our economy becomes apparent, we should consider a monetary policy that puts greater weight on financial stability."
The opinion was echoed by another committee member who said, "The need for monetary policy consideration on financial stability issues is increasing."
Any rise in interest rates could topple companies under a high debt load with the inability to pay back loans, also known as "zombie firms."
Data from the Federation of Korean Industries show that 18 out of 100 major Korean companies last year were unable to meet interest payments from their operating profit for three consecutive years.
"The government should help with the restructuring of firms with a high risk of insolvency, a crucial step in better managing financial risk. This is all the more important since calls for greater fiscal spending are very likely to grow ahead of the presidential election next year. Limiting additional spending and reducing redundant state-run projects will be the most appropriate measure," said Seoul National University economist Kim So-young.
