Korea Faces Risk of Higher Inflation
By Lee Hyo-sik
Staff Reporter
South Korea is facing growing risks of high inflation, with higher oil and agricultural prices raising the costs of various goods and services at the fastest pace since the outbreak of the global financial crisis more than a year ago.
Higher costs of vegetables and other basic necessities are putting a heavier financial burden on middle- and low-income households that continue to suffer from slower income growth as a result of the prolonged sluggish job market and other unfavorable economic conditions.
Soaring consumer prices are expected to complicate the Bank of Korea's (BOK) monetary policy meeting next week. It has hinted at a rate freeze for the foreseeable future, pledging to maintain accommodative monetary policy to facilitate the ongoing recovery.
But calls for the rate hike to rein in growing inflationary risk are gaining momentum inside and outside the central bank, which will put the seven-member monetary policy committee in a dilemma.
According to Statistics Korea, the cost of living index consisting of 152 foods and other daily essentials expanded 3.8 percent in January from a year earlier, the highest increase since November 2008 when inflation was 4 percent. These items are most frequently purchased by ordinary households and affect family finances the most.
In particular, the prices of vegetables and other fresh food articles expanded at a higher rate of 5.2 percent last month from the previous year. The price of spinach surged 70.3 percent, while retail costs of potatoes and carrots rose 59 percent and 23.9 percent.
Additionally, prices of gasoline and diesel increased 18.4 percent from a year earlier, with higher oil prices pushing up the costs of manufactured goods by 5.4 percent.
``Cold weather and the heavy snow raised prices of fruit, vegetables and other agricultural produce over the past few months. Rising global oil prices in line with the economic recovery also increased costs of auto fuels and industrial goods,'' Korea Development Institute (KDI) economist Kim Hyeon-wook said.
Kim said consumer prices will show an upward curve in 2010 as businesses and households here and abroad consume more oil and other commodities.
With state-run and private companies planning to hike electricity, bus, subway and other service charges this year, consumers will have to pay more for various services.
``If the won remains strong against the dollar, it will lower the price of imported raw materials and slow the consumer price growth here. But the thing is that expansionary fiscal and monetary policies over the past year injected an excessive amount of liquidity into the economy and created inflationary pressure,'' the economist said, stressing the BOK should increase the key interest rate gradually to head off the possible inflationary spiral.