South Korea posted the fastest growth in consumer prices in nearly four years last month, raising concerns about increasing inflationary pressure. According to data released Thursday by Statistics Korea, the consumer price index (CPI) jumped 2.3 percent year-on-year in April.
Policymakers, however, downplayed inflation fears, calling the steep price rise a temporary phenomenon. They explained that the index grew sharply due to a shortage of agricultural products and an outbreak of avian influenza. It was also affected by a surge in prices of petroleum products on the back of higher oil prices.
Saying it was still too early to worry about an inflationary spiral, they noted that pressure on prices was low last year due to the economy being hit by the fallout from the COVID-19 pandemic. They expect the prices of agriculture, livestock and fisheries products, which soared 13.1 percent year-on-year in April, will soon regain stability. The Bank of Korea (BOK) remained confident that the economy will meet its inflation target of 2 percent this year.
Yet it is difficult to totally rule out the possibility of the CPI exceeding the target, as there exist many factors that could put more upward pressure on consumer prices. That's why all the economic players ― government, corporations and households ― should pay more attention to such factors.
For starters, the Korean economy is on a solid recovery track after suffering a 1 percent contraction in 2020 amid the pandemic crisis. The country posted a 1.8 percent GDP growth in the first quarter of this year from a year before, driven by booming exports. The economy is predicted to grow by more than 3 percent this year, raising hopes for a return to pre-coronavirus levels.
The upbeat growth projection is certainly good news; however, the economic recovery could bring on inflationary pressure. We should not forget the fact that the government has provided a huge amount for relief funds and economic stimulus packages to minimize the pandemic's economic fallout. In addition, the central bank has maintained an accommodative monetary policy, cutting its key interest rate to a record low of 0.5 percent last year, with no plans to raise it anytime soon.
But some countries have already begun to increase their interest rates as there are strong signs of an economic recovery worldwide ― even the U.S. has hinted at a rate hike. Treasury Secretary Janet Yellen said Tuesday that U.S. interest rates may have to rise “somewhat” to prevent the economy from overheating. It is up to the Federal Reserve whether to raise the rate or not, but her remark was seen as acknowledging the need for an increase as the U.S. economy is predicted to grow by as much as 7 percent this year.
If the Fed hikes its federal funds rate, that could force other countries to follow suit. In that case, the BOK would have no other choice but to increase its interest rate in order to prevent foreign portfolio investors from exiting the country. The Moon Jae-in government needs to prepare for such a rate hike which could have a huge impact on the financial market and the economy.