By Yoon Ja-young
Staff Reporter
Rising global prices of crops, oil and other raw materials are weighing on the economy, for which the 6 percent growth target seems difficult to achieve. There is little policy option to cope with the external inflation shock.
The $100 per barrel of international oil prices became a reality. Following the Western Texas Intermediate, Dubai crude ― Korea's main import ― breached $100 per barrel. With further interest rate cuts by the U.S. Federal Reserve expected, analysts estimate the weak dollar to propel oil prices to new records as global liquidity flows in to the raw materials market. Now some forecast $200 per barrel to come, with newly industrialized giants like China and India soaking global oil. Crude oil has risen 250 percent since January 2003.
Prices of other raw materials began to rise around 2003, with the expansion of China and Indian economies. Copper prices rose by nearly six times during the period, and gold, which recently breached $1,000 per ounce for the first time, soared 174 percent.
The fear of agflation, or agricultural inflation, is also straining households. Wheat soared 166 percent compared with five years ago, with the concern over the supply crunch and speculative buyers driving prices way up recently. Kazakhstan, Russia and Argentina, some main wheat exporters in the global market, decided to restrict wheat exports to fight domestic inflation, but the measure added fuel to the wheat price hike in the global market.
According to the Hyundai Research Institute, prices of major crops such as beans, corns and wheat rose 57.3 percent during the last two months. ``Unlike the previous crop prices hike, which had been caused by temporary factors such as bad weather or regional conflicts, the recent hike comes from structural problems, such as the expansion of developing countries, bio fuel or global climate change,'' the institute said.
The global inflation is weighing on the household economy. According to the LG Economic Research Institute, the misery index, or the sum up of the unemployment rate and the inflation rate used to reflect economic hardships people experience in daily lives, recorded 11 as of last December. It has been surging from 9.9 in October to 10.8 in November. The think tank attributed the rise to inflation rather than unemployment.
Korean consumers will likely suffer the global inflation even more harshly due to the uniquely weak Korean won against the dollar. The dollar closed at 997.30 won, up 14.90 won from the previous day, at the Seoul foreign exchange market Friday. It is the biggest gain in 39 months, and the first rise above 990 won in 26 months. Analysts estimate the dollar is likely to break 1,000 won anytime soon.
Though the weak won enhances price competitiveness of export products, imports get even more expensive to Korean consumers. According to the Bank of Korea, the 1 percent rise of the won-dollar exchange rate pushes consumer prices by 0.07 percentage points.
The government, however, isn't likely to intervene in the foreign exchange market to fight inflation. On the contrary, the new finance minister has indicated that he prefers weak won as it helps exports.
Economic policymakers have few strategic tools to cope with the global inflation. According to an analysis, the 10 percent rise in oil prices cuts GDP growth by 0.2 percentage points. The government cut oil tax by 10 percent, at the expense of 1.3 trillion won in tax income, but the continuous rise of international oil prices already offset the tax cut.
The rising inflation will push wages, and the wages will raise consumer prices again. The Federation of Korean Trade Unions demanded a 9.1 percent pay raise, and the Korean Confederation of Trade Unions, 8 percent, citing inflation among others.