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Korea faces possible 3 percent inflation

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Deputy Prime Minister and Finance Minister Hong Nam-ki. Korea Times file
Deputy Prime Minister and Finance Minister Hong Nam-ki. Korea Times file

By Lee Kyung-min

Korea is expected to register inflation of over 3 percent this year, driven by soaring raw material prices compounded further by hesitancy among oil producers.

This bodes ill for the country's policymakers who have long maintained that the annual inflation will be kept below the Bank of Korea's target of 2 percent, weakened mostly by the once-assuring claims that the one-off, supply-side complications would have limited impact in the long term.

The figure touching 3 percent, which will be for the first time in a decade since February 2012, is almost certain, since rising commodity and oil prices will translate into higher utility bills.

Further advancing this view are slow yet clear signs of recovery in consumption amid a growing number of economies preparing to "Live with COVID-19," fuel for even sharper, demand-driven inflation.

The 3 percent inflation is highly possible, as implied by an assessment made by a finance ministry official on economic development for October.

"The possibility of 3 percent price growth is not ruled out, because of the base effect from last year," the official said during a press briefing last week. "Supply-side factors will determine the course of inflation in the coming months," he added.

The 2 percent target will be exceeded, because price rises for the past six months since April will not be broken any time soon.

Dubai crude is traded at a seven-year-high of around $80 (95,000 won) per barrel this month, higher than $72.9 and $69.2 in July and August, respectively.

The rise in price led to the Korea Electric Power Corp. (KEPCO) raising the electricity rate from the fourth quarter of this year, the first hike since November 2013.

Similarly, the rising price of liquefied natural gas (LNG) is likely to push up energy prices, resulting in higher home heating costs this winter.

A consumption recovery can add inflationary pressure from the demand side.

The Composite Consumer Sentiment Index (CCSI) has continued to hover above 100 for the past seven months since March when the figure was 100.5. An above-100 reading means optimists outnumber pessimists.

Also on the rise is domestic credit card spending with the figure registering an 8.8 percent increase from a year earlier in September. This was eight consecutive months of year-on-year increases since February.

The Ministry of Economy and Finance plans to stabilize the volatility in agricultural produce and utility prices by controlling the supply and delaying price hikes.

Deputy Prime Minister and Finance Minister Hong Nam-ki said during a National Assembly audit of the ministry Oct. 5 that the government "will not raise natural gas prices in November."

"Utility prices will not be increased in the latter half of this year. Needed price increases will be delayed until next year," he said.

Lee Kyung-min


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