Statistics Korea reported Wednesday that consumer prices rose 2.6 percent year-on-year last month. Consumer inflation marked the steepest hike in nearly a decade after recording a 2.6-percent gain in April 2012. The statistics agency attributed the hike to relatively sluggish inflation last year amid the economic slump caused by COVID-19; soaring prices of agricultural, livestock and fisheries products; and the rebound of the price of petroleum products. Economists agree the inflation rate is likely to exceed the central bank's target of an annual 2 percent for this year.
All this indicates that the government should start discussing anti-inflationary measures, however, officials still seem to be focused on blocking inflation through psychology. “The inflation rate may rise above 2 percent temporarily during the second quarter due to the low base effect from last year and other reasons,” Vice Minister of Economy and Finance Lee Eok-won said Tuesday, a day before the statistics agency released its monthly price data. “In the second half of the year, however, the prices of primary industrial products will stabilize to bring overall inflation within the targeted 2 percent.”
The government's intention to assuage inflation sentiment among economic players is understandable. It is also the position that the government should take. The problem is that the inflationary pressure appears to be more than a transient phenomenon. The factor behind the price rise is shifting from supply shortage to demand increase. Admittedly, inflation is a global trend, occurring in many advanced economies, including the U.S. and Germany. However, its impact will be more severe on Korea than other countries, given the country's snowballing household debt. Interest payments here will soar while asset values will tumble.
The looming interest rate hikes and the consequent bubble burst will be painful for the economy. However, Korea can ill afford to avoid the process lest it suffer greater damage later. The U.S. and other major economies can cushion the shock through monetary squeezing before raising benchmark interest rates. But Korea seems to have no other policy options but to increase interest rates. All economic players should brace up for upcoming rate hikes. There is no stronger precursor of an interest rate rise than climbing inflation.