Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Forecast of inflation peaking in October called into question
Daily goods are on display at a supermarket in Seoul, Sunday. Yonhap
By Yi Whan-woo
Gov't presses industries to curb food prices
By Yi Whan-woo
High inflation in Korea is supposed to finally start to peak in October as addressed by the finance minister and central bank governor. But such an outlook for an inflation peak is seriously threatened, due mainly to soaring import prices driven by the persistently strong dollar, a possible surge in global oil prices and planned utility bill hikes.
To make thing worse, prices of agricultural products have risen recently in the wake of record rainfall in late summer, while the manufacturers of instant noodles, bread, coffee, milk and other groceries have begun to hike product prices.
“Under the circumstances, whether inflation peak is in sight is questionable despite a slowdown in consumer price inflation last month,” said Seo Jeong-hun, a senior researcher at Hana Bank.
He was referring to a 5.7 percent rise in consumer prices in August from a year earlier, which marked the slowest pace since January after accelerating to a near 24-year high of 6.3 percent in July.
The August reading came as Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho affirmed repeatedly that that prices of staple foods would stabilize around October.
Bank of Korea (BOK) Governor Rhee Chang-yong forecast that price growth would hover around 6 percent for a couple of months before reaching its peak in October and then winding down after that.
Seo noted all these forecasts came before the U.S. inflation figure for August turned out to remain stubbornly high at 8.3 percent, after it hit a 41-year high of 9.1 percent in June and then eased to 8.5 percent in July.
The August inflation accordingly fueled speculation that the U.S. key interest rate could be hiked by a full percentage point during U.S. Federal Reserve's rate-setting meeting this Tuesday and Wednesday, local time.
A possible hike by 1 full percentage point beats the market expectation of 0.75 percentage points to bring down runaway inflation to an annual target of 2 percent.
In turn, the won-dollar exchange rate is approaching 1,400 won per dollar, another psychologically significant level, after it kept breaching thresholds and pushed import prices so high that trade balance remained in the red for the fifth month straight in August.
Concerning crude oil prices, the Hana Bank economist pointed out they are back to the levels before the outbreak of the Ukraine crisis in February but “can surge at any time depending on developments in the war.”
Park Chong-hoon, the head of economic research at Standard Chartered Bank Korea, speculated that import prices can remain high even if oil prices stabilize, if the Chinese economy, after reeling back from pandemic lockdowns, recovers and commodity prices go up.
“Moreover, a drop in energy prices can be short-lived with the European Union failing to cope with Russia's cut on the gas supply in retaliation to sanctions,” he said.
Joo Won, deputy director of the Hyundai Research Institute, advocated the belief that inflation will peak out next month but still underlined the possibility of “another wave of energy price hikes due to the war in Ukraine.”
The government plans to increase the electricity rate by 4.9 won ($0.004) per kilowatt-hour beginning in October, but the level of increase can be higher as energy companies struggle with snowballing losses due to the global energy crunch.
In a bid to minimize inflation shock, the Ministry of Economy and Finance, the Ministry of Agriculture, Food and Rural Affairs and other relevant ministries are gearing up for a joint campaign against excessive price hikes on consumer goods.