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Authorities should remain vigilant of looming price spiral
The signs of inflation are alarming. According to Statistics Korea, the consumer price index rose 1.5 percent year-on-year in March, marking the largest gain in 14 months since January last year. Prices of agricultural, livestock and fisheries products, which have spearheaded the recent price rise by soaring 16.2 percent in February, jumped 13.7 percent in March. The upward trend slowed down a little but remained far from stabilizing.
Industrial product and service prices also inched up 0.7 percent year-on-year, pointing to upward price pressures across the board. Nothing shows this better than the 1 percent increase in core inflation, which excludes food and oil prices that fluctuate wildly according to seasonal and external factors. The figure has hovered between 0.7 percent and 0.9 percent over the past two years. By most appearances, it is difficult to dismiss the ongoing trend as a temporary phenomenon.
An even bigger problem is that the 1.5- percent gain in consumer prices last month resulted from the government's suppression by artificial means. Utilities prices, such as electricity, gas and water, fell 5 percent in March. These charges have remained at that level since the turn of this year. However, international crude prices, which stood at $40 per barrel last year, are now fluctuating in the $60 range. It is an open secret that Korea Electric Power Corp. (KEPCO), which links its power rates to fuel costs, refrained from raising electricity prices for the second quarter at the government's behest.
There is no reason to blame the government for controlling prices for the people. It is rather the government's obligation. Nor should one exaggerate the risk of inflation in the 1 percent range. However, the price rise is one of the key economic indices to which the government should pay close attention. It is a gauge of inflation, which will inevitably lead to hikes in interest rates. Along with the foreign exchange rate, a higher interest rate could become an Achilles heel for the debt-ridden Korean economy. Economic policymakers should no longer play down the price spiral as a base effect or temporary phenomenon.
