Consumer prices continue rapid rise

Inflation kept above 4% for 6 straight months

By Kim Tong-hyung

The Bank of Korea (BOK) is facing its sternest test since the global recession as inflation continues to hover above expectations, piling pressure on policymakers to raise rates just as the government concedes its growth-first agenda.

Consumer prices rose 4.4 percent in June on an annualized basis, compared to the 4.1 percent gain in the previous month, marking the sixth consecutive month of above-target inflation, Statistics Korea said Friday.

The so-called ``core’’ inflation, which outstrips volatile food and energy prices from the cost of living, was measured at 3.7 percent to reach the highest level in 25 months.

The latest data was announced a day after the government reduced its annual growth forecast for the country from 5 to 4.5 percent and lifted its inflation predictions from 3 to 4 percent. The adjustments, unveiled in a news conference by economic ministers, doubled as their admission that putting growth before inflation in the past months was a mistake.

Despite the soaring prices, the BOK’s rate setters have been reluctant to clamp down hard on money supply as they judged the recovery as too fragile to withstand a significant increase in borrowing costs. However, the government’s step-change may influence the bank to be more assertive in its attempt to halt the damage to savings and spending power.

After holding back for the previous two months, the bank increased its policy rate by a quarter of a percentage point to 3.25 percent in June and will hold its next rate-setting meeting on July 14.

Any move could prove too little, too late, with all signs suggesting that the inflationary threat will worsen before it improves.

Economists are concerned over the effect of the imminent rises in fuel prices and public utility bills. And this is one of the years when the Chuseok holidays, the annual price inflator, comes in early September, not that the country needs further proof that it picked a bad year to have an inflation problem.

``The soaring costs for processed food products and rents appear to be the latest forces driving up inflation. In particular, rents, which has been rising at an annualized rate of 4 percent, compared to last year when it showed inflation of around 2 percent, have really jacked up core inflation,’’ said Yang Dong-hee, the head of Statistics Korea’s consumer price statistics division.

Rents have been soaring in recent months due to strong tenant demand as a decaying housing market and fragile economy have discouraged first-time buyers from scaling the property ladder.

The prices of fresh food, such as vegetables, fruits and fish, rose 4.7 percent year-on-year in June, but were down by 3 percent compared to the preceding month.

The cost of industrial products increased by 5.8 percent, driven by dearer oil products, which saw their prices jump by nearly 13 percent. Gasoline prices were 9.3 percent higher in June than the same month last year, while diesel costs are 12.4 percent higher.

Service sector inflation was measured at 2.9 percent, driven by the 4 percent growth in rents, which represented the sharpest rise since April 2003. The restaurant prices of ``samgyeopsal,’’ or pork belly cuts, a traditional favorite of meat lovers here, jumped 16.6 percent compared to last year, while diners paid 15.3 percent more for pork ribs last month than they did last year.