Food, fuel prices stir inflation concerns

By Kim Tong-hyung

The Korean economy in 2011 was characterized by high inflation and squeezed income. It bears further watching whether 2012 proves to be a sequel.

Newspapers these days are printing the same headlines in their finance sections they have used for the larger part of the past 12 months. Prices are rising faster than preferred on food and fuel bills, causing further misery for consumers combating deteriorating family finances and stagnant wages.

Prices for basic ingredients like meat, fish, fruit and vegetables are surging ahead of the Lunar New Year holiday, an annual inflation feeder. And there are concerns that that U.S.-led efforts to weaken Tehran economically and derail its suspected pursuit of nuclear weaponry will pump up petrol prices here as Korea has been one of Iran’s biggest crude customers.

Add these to the background of flattened wages, unemployment and crippling personal indebtedness and one has to wonder whether the choke on households will ever let up.

While inflation was above the government’s 4 percent target for most of 2011, policymakers here have been praying for the price pressures to ease as they prepare to put growth before price stability amid worries of another global financial crisis.

It could be expected that year-on-year headline inflation will decline on an ``inverted’’ base effect alone, making room for the Bank of Korea (BOK) to shave interest rates and jolt money supply.

However, an annual fall in the consumer price index (CPI) isn’t likely to be argued as an indicator for improving living standards as most observers expect month-on-month figures to remain on the plus side in the coming months.

LG Economic Research Institute’s (LGERI) weekly index on prices of daily necessities marked 110.1 on the week up to Jan. 4 and 110.5 on Jan. 11, representing 7.8 and 7.7 percent growth from a year earlier, respectively. The annual margin of growth has been declining steadily since early November when it was still in double digits.

A sub index for petrol products has been moving in the opposite direction. The petrol price index, which includes gasoline, diesel and gas, was measured at 115.7 as of Jan. 4 and 116.7 as of Jan. 11, with the year-on-year increases measured at 8.2 percent and 8.9 percent, respectively.

The index tracks the prices of 70 essentials and major items of consumption, including food and energy, with the levels of 2010 serving as the base of 100.

``While we are only two weeks into 2012 and it’s hard to project anything with a level of certainty, it’s obvious that the growth in the cost of living is subduing at least by year-on-year standards,’’ said LGERI economist Kang Joong-koo.

``After reaching 17 percent in August last year, the year-on-year growth of the petrol price index has been consistently declining. However, there are obvious reasons to expect a rebound at the start of the new year and we should be checking the prices carefully for the next two to three weeks.’’

The recent spike in food costs also warrants attention as it seems the prices of most vegetables, fruits and fish are increasing by more than 5 percent.

A kilogram of sweet potatoes was selling for 5,729 won on Jan. 11, representing more than a 37 percent increase over a week, while the prices of squid and garlic each rose by more than 30 percent as well.

The prices of zucchinis and radishes jumped in double digits, while tomato, apples, green onions, shellfish and tangerines became around 6 to 7 percent more expensive in the same week. Costs of gasoline, diesel and other fuel sold at gas stations increased by more than 2 percent over the period.

The Bank of Korea’s monetary policy committee kept interest rates at 3.25 percent for the seventh consecutive month last week amid concerns about the strength of the economic recovery and the eurozone debt crisis.

Keeping the benchmark rate lower than the pace of consumer price inflation, which was measured at 4 percent for the whole of 2011, continues to be an uncomfortable decision for the central bank, which has been powerless to halt the damage to spending power and savings.

However, a clampdown on money supply is obviously not an option when the heady mixture of negatives surrounding the country from inside and out threatens to derail its fragile recovery.