Rising inflation biggest threat to economic recovery

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By Lee Kyung-min

Inflation has been accelerating fast, as consumer prices grew over 2 percent in August for the fifth consecutive month due to a surge in prices of groceries and oil products.

Continuing buildup in inflationary pressure has been emerging as a major stumbling block to the much-anticipated economic recovery, throwing further pressure on the Bank of Korea to deliver another rate hike following one last month.

According to Statistics Korea Thursday, consumer prices jumped 2.6 percent in August from a year ago. The prices also rose 2.6 percent in July and May, well above the central bank's inflation target of 2 percent.

The consumer price increase has been driven by skyrocketing prices of fruit and vegetables as well as oil products. Egg prices soared by 54.6 percent last month, followed by spinach (35.5 percent), powered red pepper (26.1 percent), rice (13.7 percent) and pork (11 percent). Prices for petroleum products jumped 21.6 percent.

Prices of eggs have reported double-digit growth for the eighth consecutive month since January when the year-on-year increase was 15.2 percent.

Seoul National University economist Lee In-ho said price increases will be sustained by liquidity pumped in by the government with a second extra budget of 34.9 trillion won ($30 billion).

“Cash relief given to 88 percent of the country's population is likely to push up the price of goods and services through September,” he said. “Whether government claims of limited consumer sentiment tightening in the third quarter will manifest remains to be seen.”

Soaring grocery prices and an overall increase in daily necessities including transport and housing costs are likely to put greater strain on low-income earners, as inferred by real gross national income (GNI) reporting a 12-month low of a 0.1 percent quarter-on-quarter jump in the second quarter.

First Strategy and Finance Vice Minister Lee Eog-weon said uncertainty in consumer prices will remain elevated through September.

“Consumer prices will face downward pressure due to improved agricultural supply and demand conditions, and at the same time upward pressure from spending demand before and during the holiday season,” he said at the vice-ministerial-level meeting in Seoul. “The government will prepare measures to supply agricultural and fishery produce.”

Another rate hike looming

Rising inflation has put the BOK under greater pressure to raise its key interest rate again in the upcoming rate-setting meeting slated for October and November. The BOK increased the base rate by 25 basis points to 0.75 percent on Aug. 26, the first rate hike in nearly three years, to curb inflation and rein in soaring household debts.

Following the August meeting, BOK Governor Lee Ju-yeol hinted at another rate increase, saying, “The rate increase is our first step toward the goal of alleviating the financial imbalance.”

In the meantime, the BOK reported Thursday that the nation's GDP grew 0.8 percent in the second quarter from the quarter before, 0.1 of a percentage point higher than the previous estimate, on the back of robust exports.

Exports reporting a 34.9 percent year-on-year increase of $53.2 billion in August bode well for the country's recovery, but whether the much-needed recovery will advance hinges on the degree of containment of the Delta variant-sparked fourth wave of the pandemic.