Inflation fears weighing on Korean economy

Producer price growth hits 10-year high

By Lee Kyung-min

The specter of inflation is looming larger and larger, with the nation's producer price growth hitting the highest level in nearly 10 years amid soaring raw materials and oil prices fueled by a rebound in international trade.

Given the fact that producer price increases are reflected in consumer prices with a time lag of a few months, inflation woes will further deepen in the coming months pressuring the Bank of Korea to raise its key interest rate earlier than expected. Consumer prices have already exceeded the central bank's inflation target of 2 percent for the two straight months.

Data from the central bank released Tuesday showed that producer prices reported a 0.4 percent month-on-month increase in May, led by a price jump for industrial goods, due to higher oil and raw material prices. It was the seventh consecutive month of increases.

On a year-on-year basis, the prices surged 6.4 percent, the highest since the 6.9 percent rise in August 2011.

Prices of goods with imported products factored in also rose 0.5 percent from a month earlier, due to increases in the prices of raw materials and intermediate goods.

Producer prices are highly likely to continue this months-long increase, as crude oil and raw material prices show no signs of falling, Seoul National University economist Kim So-young said.

"The prices of final goods produced by the manufacturing industry, for example, will jump, if those of crude oil and raw materials rise. Inflationary pressure will continue in the coming months," Kim said.

Brent crude for August settled at $74.90 (84,700 won) a barrel, while U.S. West Texas Intermediate (WTI) crude for July ended at $73.66, Monday (local time)

Both benchmarks have risen for the past four weeks, driven by optimism over the expected surge in demand for summer travel following the global COVID-19 vaccination push.

The Bank of America said Sunday (local time) that Brent crude was likely to average $68 a barrel this year and could further hit $100 next year on unleashed pent-up demand.

Prices for U.S. hot-rolled, coil steel, the most widely produced, finished steel product, hit a record high of $1,616 per ton Friday, more than triple the figure of around $500 from last August.

Businesses are being pressured to increase their sales prices to offset the rise in manufacturing costs, further undermining the spending power of consumers already under pressure amid a notable rise in the costs of food and daily necessities.

Statistics Korea data showed the consumer price index for 142 daily necessities frequently purchased by consumers rose 3.3 percent in May from a year earlier, while the prices of agricultural produce jumped 16.6 percent.

These prices were among an overarching consumer price index, which rose 2.6 percent year-on-year in May, a continuation of the figure exceeding the central bank's target of 2 percent for two straight months. The figure for April was 2.3 percent.

BOK Deputy Governor Park Jong-seok indicated an earlier-than-expected key rate hike Tuesday, conditional on his assessment of the country's macroeconomic conditions.

"The pace of economic recovery is accelerating, with the inflation rate unlikely to veer far off from the target level. A greater emphasis will be placed on reducing the financial imbalance that was intensified last year," he said during a press briefing at the bank's headquarters in Seoul. "If solid growth continues, the central bank will maintain its existing stance, that the current monetary policy will be normalized in an orderly manner, from an appropriate point in the future."

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