By Kim Jae-kyoung
Staff Reporter
Soaring oil prices have sent prices higher and higher, raising concerns over a wage price spiral, in which wages and prices chase each other ever upward, leading to uncontrolled inflation.
The Bank of Korea (BOK) reported Wednesday that wholesale price rises hit a new high in June, surging 10.5 percent year-on-year, the 10th consecutive monthly increase since last August.
This was the biggest year-on-year jump since November 1998 when prices surged 10.9 percent.
The growth pace has been accelerating since last August ― and this year prices increased 6 percent in March, 7.6 percent in April and 9 percent in May.
``Prices of manufactured goods jumped due to soaring oil prices, pushing up producer prices,'' BOK economist Youn Jae-hoon said.
``Given oil prices are expected to rise further down the road, producer prices are likely to remain high, which will jack up consumer prices,'' he added.
Consumer prices grew at their fastest pace in nearly 10 years last month, rising 5.5 percent in June from a year ago, the highest since November 1998 when prices jumped 6.8 percent
Market analysts expect the central bank to tighten credit in order to curb inflation and prevent it from morphing into a wage price spiral.
Under this vicious cycle, a rise in international oil and raw material prices raises product prices, which in turn raise labor costs. The wage increases, in turn, seeps into product prices, forcing workers to demand another hike in wages.
``One of the key reasons central banks of advanced economies, including the European Central Bank, have raised interest rates was concerns over wage price spiral. The BOK should raise rates to head this off.'' Citigroup economist Oh Suk-tae said.
``Once inflation ― although chances are low ― seeps into wages and thus increases inflation expectations, it will go out of control,'' he added. ``Though the link between prices and wages has become looser lately, it is necessary to take preventive measures to avoid a wage price spiral.''
Morgan Stanley analyst Sharon Lam also pointed out that inflation could get out of control in Korea when labor unions press for aggressive wage increases due to inflation.
To make matters worse, the money supply grew at its fastest pace in May in almost nine years, fueled by an increase in financial institutions' lending to households and corporations.
The central bank said that M2, a broad category within the money supply, surged 15.8 percent in May from a year ago, the biggest monthly increase since June 1999 when it soared 16.1 percent. The M2 growth rate was 13.4 percent in February, 13.9 percent in March and 14.9 percent in April
M2 includes all physical money such as coins and currency, as well as demand deposits. This is used to quantify the amount of money in circulation.
``The growth in money supply increases inflation expectations,'' a BOK official said.
The rapid growth in money supply is expected to add to growing inflationary pressure, giving more leeway for the central bank to raise interest rates at its monetary policy committee meeting slated for Thursday.
``The central bank should hike interest rates to tame inflation even at the expense of economic growth,'' Sungkyunkwan University economics professor Lee Jae-woong said.
``The central bank's neutral stance is too easy-going, given that all price indicators point to rising inflation down the road,'' he added.
The central bank has kept the benchmark seven-day repurchase agreement rate unchanged at 5 percent for the past 10 months in a row.