By Cho Jin-seo
Staff reporter
The specter of high inflation is looming larger, as rising metal and food prices are expected to stoke inflationary pressure in the economy in the second half of the year.
Several economic institutes have published reports on concerns of the so-called ``agflation’’ and ``ironflation,’’ which can push up the prices of other items in a snowball effect. Agflation and ironflation describe inflation led by rises in prices of agriculture goods and iron ore, respectively.
The worries about inflation are making the government consider implementing more prudent fiscal measures, while giving more leeway for the central bank to raise the key interest rate earlier than previously expected.
Their biggest concern now is the price of iron ore, which is 100 percent imported. Iron is used in so many consumer and industrial products such as cars, buildings and appliances, so its influence on inflation is enormous.
If the raw iron ore price traded in the global commodity market doubles, it will force the Korean steel producers to push up the prices of their products by 4.47 percent, and then in a chain reaction, the overall consumer price index will rise by 0.35 percent, warns a report from the Korea Development Bank.
``The price rise of iron ore causes a chain reaction in other commodities prices, and it eventually leads to inflation,’’ says the report authored by Park Eun-soo. ``It also deteriorates profitability for overall industries, and raises consumer prices.’’
The 2010 global demand for iron is likely to increase by almost 10 percent from last year, according to the World Steel Association, due to brisk economic growth in China and elsewhere. The standard price of iron ore was below $20 per ton in 2002, but it is now fetching more than $110 a ton.
Accordingly, POSCO, the largest Korean steelmaker, has raised prices of its products from 9 to 27 percent this year, which means that the implication of high metal prices on the economy can be more severe than the forecast by the Korea Development Bank.
For ordinary citizens, what is more biting is the price of agricultural products. The unusually cold and snowy winter and spring weather this year has reduced the yields of core crops to a shocking level.
The wholesale price of top-quality cabbage has reached 6,000 won ($5.50), according to the Seoul Agricultural & Marine Products Corporation, which is about 40 percent more expensive than usual. Other vegetables are suffering from a severe supply shortage as well.
Farmers are now worried about the damage of the cold spell on their fall harvests, because many of their crops were unable to pollinate in the spring.
One consolation for the central bank is the exchange rate of the Korean currency. The won has appreciated against the dollar by 18 percent over the past year, and the strengthening of the won is acting as a cushion on the dollar price hike of imported items. But this also means that the effects of high food and metal prices will loom larger when the exchange rate stabilizes or reverses, researchers say.