Rising commodity prices threaten recovery

By Kim Jae-kyoung

Inflation has emerged as the major stumbling block preventing the economy from fully recovering from the economic slump, as commodity prices are skyrocketing while food prices are not declining.

The upside risk to consumer prices are highly likely to pressure the Bank of Korea (BOK) to raise the key interest rate at its first monetary policy committee meeting in January, 2011. The BOK froze the rate at 2.5 percent in December.

According to the Korea National Oil Corp. Thursday, Middle East crude for sale to Asia climbed to the highest in almost 27 months as futures in New York rallied on expectations that demand growth will accelerate.

Dubai oil for loading in February, which accounts for around 80 percent of the nation’s oil imports, breached the $90 mark per barrel Wednesday, for the first time since Sept. 29 in 2009, reaching $90.31. It further climbed to $90.51 Thursday, up $22.23 or 32.4 percent from the yearly low of $68.28 on May 25.

Brent North Sea crude for February delivery also rose to $93.20 a barrel on the New York Mercantile Exchange Wednesday, the highest level since Sept. 30 in 2008. South Korea, which relies almost entirely on imports for its oil needs, is the world’s ninth-largest oil consuming country.

“Oil prices have continued on an upward spiral on rising demand. The prices are expected to increase further as growing expectations over the U.S. economic recovery will boost consumption,” a senior BOK economist said.

“Downside risks to growth are rising and upside risks to inflation are increasing. So that is the balance that policymakers should now be focusing on in terms of potential action," he added.

The price of copper, which is considered a good indicator of the economic cycle, is also soaring, with three-month futures reaching a record high of $9.36 Wednesday on the London Metal Exchange.

The problem is that hikes of commodity prices will cause a domino effect on local consumer prices as they are translating into domestic gas prices and other basic food costs.

Last week, the average price at gas stations across the nation stood at 1,767.6 won per liter, the highest level since the second week of August. In Seoul, the per-liter price is approaching the 2,000 won level. According to the BOK, every 10 percent rise in international oil prices raises local consumer prices by 0.2 percentage points.

The Samsung Economic Research Institute has recently raised its forecast for average Dubai prices for 2011 to $82 from the previous prediction of $72, indicating that the inflationary pressure will not wane in the near future.

Affected by rising oil and other material costs, Korea’s import prices expanded at the fastest pace in six months in November. Prices of imported goods and raw materials climbed 8.2 percent last month from a year earlier, accelerating from an 8.1 percent rise in October.

The November reading was the fastest growth since an 11.3 percent rise in May. Costs of imported nonferrous metals increased 19.6 percent on-year in November while prices of oil rose 10.9 percent.

‘Chinaflation‘

In its report Thursday, the central bank expressed concerns that consumer prices will be under upward pressure due to high-flying costs of oil, forecasting the prices to grow in the mid-3 percent range for a considerable period of time.

"As the global economy recovers, raw material costs will continue to rise and a pick-up in China's inflation is expected to exert pressure on Korea's consumer prices to rise as well," it said in a statement.

The BOK raised its inflation projection for next year to a three-year high of 3.5 percent from a 2.9 percent advance for this year.

China's consumer price index rose to the highest level in 28 months, with its consumer price index (CPI), a key measure of inflation, rising 5.1 percent last month from a year earlier.

At a meeting with foreign correspondents here, BOK Governor Kim Choong-soo warned of the so-called Chinaflation, an inflation triggered by price hikes in China, saying, “Wage hikes and rising prices in China will exert an upward pressure on domestic prices.”