ED Spiraling inflation

Take bolder action to stabilize consumer prices

Inflation fears are growing after consumer prices jumped 3.2 percent year-on-year in October, the highest gain since January 2012. Surging oil prices were cited as the major cause of the steep rise, ramping up prices of petroleum and industrial products. Those for public services also climbed sharply.

It is shocking to see consumer prices surge above 3 percent after staying in the 2 percent range for six consecutive months. More worrisome is that the spiraling inflation is likely to persist for the time being. International crude prices are showing no signs of falling anytime soon. Prices of raw materials such as iron ore and aluminum are also rising.

However, the government has few policy options to bring inflation under control. Oil prices have already hit a three-year high on the back of the global economic recovery. Prices of Dubai crude, the main source of South Korea's oil imports, climbed to a yearly high of $84.37 per barrel Oct. 25, up from September's average of $72.63.

The Ministry of Economy and Finance has decided to cut fuel taxes by 20 percent for about six months starting Nov. 12 in a bid to tame inflation. The ministry expects the cut to help reduce inflation by up to 0.33 percentage points. It is also seeking to freeze natural gas bills and curb the rise of utility charges until the end of the year.

But such measures appear to be insufficient to keep runaway consumer prices in check. The state-run Korea Electric Power Corp. plans to raise electricity rates in the fourth quarter to cope with the higher prices of oil and other energy sources. In addition, many other factors exist that will further stoke inflation. People are vying to return to normal life at a rapid pace under the government's “Living with COVID-19” policy which could boost consumption and cause price hikes.

Against this backdrop, the Bank of Korea (BOK) will be unable to meet its 2 percent inflation target for this year. The central bank cannot avoid criticism for failing to take preemptive measures. It raised its key policy rate by 0.25 percentage points to 0.75 percent in August. The rate hike came 15 months after it lowered the rate to a record low of 0.5 percent to cushion the COVID-19 shock. It is, however, doubtful if the BOK is ready to take bolder steps to fight inflation.

Now attention is focused on whether the central bank will increase the rate at its final Monetary Policy Board meeting of the year set for Nov. 25. There have already been growing calls for another rate hike to stabilize runaway home prices and reduce soaring household debt. The BOK should no longer delay in taking proactive measures.

It is equally important to take action to ease the interest payment burden on low-income earners after raising the key rate. An increasing number of people have begun to feel pressured by the rising market interest rates amid the government's policy of reducing household loans. The financial authorities also need to stabilize the depreciating Korean won against the U.S. dollar which could raise import prices for oil, raw materials and other products.