High inflation expected to persist throughout 2nd half

Consumer inflation outlook hits all-time high of 4.7% in July

By Yi Whan-woo

Consumer expectations for inflation hit a record high at 4.7 percent in July, while their confidence in economic prospects fell to the lowest level in nearly two years, a Bank of Korea (BOK) survey showed, Wednesday.

The survey suggests consumers are not optimistic about inflation letting up in the second half, in contrary to the country's top economic policymaker who forecast prices will peak out in the months to come.

The survey, conducted from July 11 to 18 on 2,500 households, showed that consumers expect inflation to average around 4.7 percent over the next 12 months.

The figure marked the highest level since the central bank began compiling related data in July 2008.

This year, the figure remained in the 2 percent range between January and March before hovering in the 3 percent range between April and June.

Consumers' inflation outlook in July also accelerated at the fastest pace ever, up 0.8 of a percentage point from June, when it climbed 0.6 of a percentage point from May.

“It appears consumers think prices for day-to-day commodities will not fall sharply in the second half of this year,” Hwang Hee-jin, a senior BOK official, said during a press briefing.

Hwang attributed the gloomy expectation mainly to the near-24-year high of 6 percent inflation in June.

Correspondingly, nearly one in four survey takers responded that they think inflation will exceed 6 percent for the next 12 months.

Regarding items, 68 percent of the respondents speculated inflation will be driven mainly by prices of petrochemical products. Another 48.5 percent picked public services while 40.1 percent picked agricultural and livestock products.

The same survey also showed the consumer sentiment index standing at 86 in July, down 10.4 points from June and slipping to the lowest point since September 2020 when it was at 80.9.

The index measures how consumers assess future economic conditions and living standards. Any reading below 100 means that there are more people who are skeptical about the economic outlook compared to the previous 10 years.

Meanwhile, the survey did not take into account the effects of the BOK's unprecedented big step on the benchmark interest rate on July 13, when it delivered a half-percentage-point hike.

Under the circumstances, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho expects that inflation will peak out in October.

“The prices of staple foods are anticipated to stabilize after October,” Choo said during an interpellation session at the National Assembly on Yeouido, Seoul, Tuesday. “The government will take necessary measures by all means to curb prices.”

Analysts agreed with Choo over when the inflation will peak out.

“Consumers' inflation expectation should not be overlooked as it is used as a reference for wages and other factors that can push inflation upward,” said Park Chong-hoon, the head of economic research at Standard Chartered Bank Korea.

“But it takes times, possibly several months, before consumers' inflation expectation actually has an impact on prices, and in that regard, I think it will have little influence at least in the second half.”

Joo Won, deputy director of the Hyundai Research Institute, said prices of crude oil and other raw materials are showing signs of a fall over fear of a global recession and that it can result in a downward trend for inflation soon.

“Inflation possibly will be at its peak in July, and if not, in August,” he said.