Taming inflation is getting more difficult as consumer prices shot up last month by more than 4 percent for the first time in a decade. This casts a dark cloud over much-touted efforts by the incoming Yoon Suk-yeol administration to improve the people's livelihoods by speeding up an economic recovery.
On Tuesday, Statistics Korea said consumer prices surged 4.1 percent in March from a year earlier, hitting the highest level since December 2011 when the prices jumped 4.2 percent year-on-year. The upsurge came after consumer prices remained in the 3 percent range in February for the fifth consecutive month.
The statistics office attributed soaring inflation to higher energy prices following the Russian invasion of Ukraine and growing demand-pull price pressure amid eased COVID-19 restrictions. Dubai crude, Korea's benchmark, climbed to a yearly high of $127.86 per barrel in March from around $80 per barrel in early January.
Against this backdrop, prices of petroleum products skyrocketed 31.2 percent year-on-year in March, compared to a 19.4 percent rise the previous month. Prices of processed food rose 6.4 percent, driven by global grain price hikes amid the Ukraine crisis. Personal service prices grew by 4.4 percent as people engaged in more outdoor activities amid eased social distancing rules despite the fast spread of the Omicron variant.
The ever-increasing inflationary pressure should not come as a surprise. Many economists have already rung the alarm bell, raising fears of stagflation, a combination of an economic stagnation and inflation. In fact, such fears are highly likely to become a reality, as the Bank of Korea (BOK) predicts monthly inflation to stay above 4 percent for the time being.
In January, the BOK, which is primarily tasked with ensuring price stability, projected inflation for this year at 3.1 percent. Now it will have to revise up the projection as inflationary pressure intensifies. There are many destabilizing factors such as the Ukraine war, global supply chain disruptions, and an emerging new Cold War pitting the U.S. and its allies against Russia and China.
The BOK needs to take more preemptive steps to bring inflation under control. It has raised its key interest rate three times since last August ― from a record low of 0.5 percent to 1.25 percent. Additional rate hikes appear to be inevitable. The outgoing and incoming administrations must cooperate in approving the nomination of Rhee Chang-yong as BOK governor so that he can take timely and proper measures to keep inflation in check. As the U.S. Federal Reserve is expected to raise its benchmark interest rate sharply this year, the BOK should no longer delay further rate hikes.
The government has decided to cut fuel taxes by a record 30 percent from the current 20 percent for three months from May to ease the energy cost burden on consumers. The cut is necessary, but not sufficient to stabilize overall prices. The incoming president should focus more on fighting inflation than hastily stimulating the economy at the expense of price stability. He must keep in mind that no one wants to live in fear of inflation.