ED Inflation spiral

All-out efforts needed to avoid economic woes

Consumer prices soared 6 percent year-on-year in June, hitting the highest level in almost 24 years, according to Statistics Korea. The prices have continued to climb, particularly since soaring 5.4 percent in May, heightening fears of stagflation, a phenomenon of simultaneous economic stagnation and higher inflation. The statistical office attributed runaway inflation to a surge in the prices of energy, resources and food. The surge was steepest since November 1998, when prices skyrocketed by 6.8 percent during the Asian financial crisis.

The country has also continued to face growing inflationary pressure arising from global supply chain disruptions amid the protracted war in Ukraine, coupled with rising demand for daily necessities and services following the lifting of COVID-19 restrictions. Worse still, consumer prices are expected to rise further as electricity and gas rates will continue to go up. It will be almost impossible to bring inflation under control unless global prices of fuels, resources and food go down.

The Bank of Korea (BOK) forecast last month that inflation will rise in the latter half of the year, affected by the continuing global shortage of items such as oil and grains. The central bank expected consumer prices to increase up to 4.7 percent this year. But now, some economists forecast the annual figure will be much higher. Global credit rating agency Standard & Poor's predicted Monday that Korea's consumer prices will increase 5 percent for the year.

What is worrisome is the people, especially low-income workers, will have to bear the brunt of the spiraling inflation. The Yoon Suk-yeol administration should come up with bold measures to regain price stability and maintain the momentum for economic growth. Making matters worse, the nation also faces multiple looming crises arising from higher interest rates and the rapid depreciation of the Korean won against U.S. dollar.

According to the Ministry of Trade, Industry and Energy, the nation registered a record trade deficit of $10.3 billion in the first half, with exports of $350.3 billion and imports of $360.6 billion. Overseas shipments in June rose only 5.4 percent, posting a single-digit growth for the first time in 16 months. This rang an alarm over sluggish exports which have been buttressing the Korean economy. Against this backdrop, the nation's foreign reserves slid to $438.28 billion in June, down by $9.43 billion from the previous month.

In a bid to stem the rise in consumer prices, the BOK is expected to raise its benchmark policy rate this month, probably by an unprecedented “big-step” hike of 50 basis points. Yet, such a drastic rate hike is feared to have a far-flung adverse impact on debt-laden households. Expressing concerns that the nation may face unpredictable economic woes, President Yoon has vowed to deal with economic issues swiftly.

It remains to be seen whether the Yoon administration will successfully cope with a set of downside risks and negative external factors which are getting out of control. Yet, the government and the ruling People Power Party (PPP) should go all out to keep surging consumer prices in check and tackle the imminent economic contingencies.