Desperate Korea goes all-out to curb inflation

By Kang Seung-woo

The Korean government’s decision to cap prices for utilities reads as a desperate move to prevent inflation from soaring and crippling the country’s economic recovery.

But observers are mixed on whether the government’s dependence on forceful steps will be enough to calm the economy in 2011.

The package of anti-inflation measures announced Thursday included the freezing of power, gas and transportation prices, and policymakers will also press the country’s colleges to freeze tuition.

The Bank of Korea, the country’s central bank, backed the anti-inflation policies by raising its key interest rate by a quarter percentage point to 2.75 percent for January,

The measures come at a time when there are increasing worries that the increasing price instability will hurt the livelihoods of low-income families and weaken the country’s economic recovery. Fresh food prices in particular jumped 21.3 percent year-on-year in 2010, compared to the 2.9 percent gain in consumer prices.

President Lee Myung-bak vowed a ``war’’ against inflation on Jan. 3 and this led the related government agencies to scramble to come up with measures to stabilize prices and match the government’s annual inflation estimate of 3 percent.

``The top priority of our economic policies will be price stabilization for the first half of the year, and we will be responding to the development of market situations in a comprehensive way,’’ Ministry of Strategy and Finance said in a statement.

“The government will manage its macroeconomic policy in a flexible manner, keeping prices under control while taking into account not just economic but also job market conditions. To this end, we will come up with an appropriate policy mix through close coordination with other relevant agencies.”

Yoon Jong-won, director general of economic policy at the Finance Ministry expressed confidence in the government’s commitment to curb inflation being reflected quickly in the markets.

Other observers weren’t so sure whether the measures would be enough to keep the growing inflationary pressure at bay.

“Inflation forcibly contained in the first half can balloon in the latter part of the year, posing a bigger threat,” said a Seoul-based economist who preferred not to be named.

“In addition, the current inflation is due to uncontrollable factors _ rising demand for oil and a shortage of supply, affected by an unusual cold spell.”

Fred Neumann, co-head of HSBC’s Asian Economics Research, said that the government’s plans to keep inflation under control are expected to have short-term effects.

“We do agree that inflation is rising in Korea ... I think that the measures (will be effective) in the short term to help contain inflation expectations, but over the long term, only one very effective tool to help reduce inflation in Korea is tightening monetary policy,” he said in a conference call on Monday.