Expected oil price hike fuels fears of inflation

By Kim Tong-hyung

Fears of inflation fueled by higher petrol prices are beginning to grip the nation known for its bad traffic. It’s questionable, however, whether relief is to be found in the corridors of economic ministries, which appear at a loss after letting consumer prices rise.

After downplaying the situation for months, government officials are finally admitting that the inflationary threat is worse than anticipated. Inflation has been at least a point above the government’s 3 percent target for every month this year through May, and Vice Finance Minister Yim Jong-yong expects the price pressures to maintain their current force for the foreseeable future.

In a meeting between economic ministries at the Gwacheon Government Complex Tuesday, Yim also warned of the effect of imminent price hikes in gasoline and diesel.

After arm-twisting by government officials, the country’s four refiners, SK Energy, GS Caltex, Hyundai Oilbank and S-Oil, agreed to temporarily lower their fuel prices by 100 won per liter for a three-month period that will end on July 6.

They are now preparing to push prices back up, and economists predict a 100 won a liter increase in petrol costs could add 0.2 to 0.3 point to the consumer price index (CPI), the official measure of inflation, making it a bigger factor than just about any other variable.

“Despite our great efforts (to contain prices), consumer prices are expected to keep rising for some time. As this will press low-to-middle class families, the fight against inflation will be our top priority in policies for the second half of the year,” said Yim, adding that the rise in food prices, restaurant bills and services charges are “of particular concern.”

“The inflation expectations appear to be influencing service providers to continue raising their prices even when there are cost-related changes that allow them to lower them. Processed food producers are also inventing sneaky ways to raise the prices of their products when the cost factors aren’t there, and this is an area that warrants close monitoring by the government,” said Yim.

Government officials would be euphoric should refiners decide to extend the discounts or at least resist raising prices immediately by 100 won a liter. But after taking much flack for bullying the corporate sector, the authorities are going out of their way to insist that no further pressure will be put on refiners.

Now it’s the gas stations’ turn to be at the receiving end of finger pointing. Yim offered a stern warning against owners of gas stations who are racing to acquire more oil before the expected price hikes after July 7, which has been leading to supply disruptions and shortages in many areas.

“Stations that reduce or halt the provision of fuel or restrict its sale without a justifiable reason will be hit with business suspensions and may even face criminal charges. The economic ministries should coordinate their efforts to reduce disruption after the refiners up their prices again,” Yim said.

It bears further watching whether policymakers could back their stinging remarks with effective action. They have chucked everything including the kitchen sink at the beast of inflation, only to see their efforts fail to work. After exhausting all the options, it’s difficult to anticipate what’s next.

Perhaps the biggest mistake of the government was to allow the fight against inflation to depend entirely on its ability to suppress companies from raising consumer prices.

Despite the inflation alarm growing louder, policymakers, judging the economic recovery as too fragile to withstand a significant increase in borrowing costs, have been avoiding a hard clampdown on the money supply and resorted to price controls instead.

They justified their heavy-handed approach by claiming that refiners had been ripping off customers by raising fuel prices faster than the increase in crude costs and acting coy when international prices came down.

The cost of crude was moving around the $105-110 per barrel range three months ago, but now appears to have settled in the low 90s. This means that refiners likely have room to lower fuel prices further instead of raising them. However, the companies are now preparing to increase tariffs and government officials can’t do anything but look away.