Hike in utility fees feared to have domino effect on inflation

Outdoor units of air conditioners are installed outside a building in central Seoul, Monday, when the government announced plans to raise the price of electricity. Yonhap

Experts advise Bank of Korea to move faster to curb prices

By Yi Whan-woo

Hikes in utility fees, including a sharper-than-expected increase in the electricity rate, Monday, are stirring up concerns of heightened inflation reminiscent of the Asian financial crisis in the late 1990s.

Analysts said Tuesday that such an unwanted domino effect can push the annual inflation rate above 5 percent, which is higher than the mid to upper 4 percent range forecast by the government and the central bank.

Announced by the Ministry of Trade, Industry and Energy, the electricity rate will rise by 5 won per kilowatt-hour beginning in July, which is the sharpest increase seen since a new billing system went into effect in 2021.

The system takes into account international fuel prices in adjusting the electricity rate every quarter. The rate was frozen for months under the previous Moon Jae-in administration as part of efforts to lessen the financial burden on the public.

The change in the price of electricity under the Yoon Suk-yeol administration means a four-member household consuming 307 kilowatt-hours a month will pay an additional 1,534 won.

Such an increase will be followed by a hike in gas prices by 1.11 won per megajoule, also starting in July. The increase will raise the gas price for a four-member household by 2,220 won a month.

The ministry's decision to raise the electricity rate was mainly aimed at capping snowballing losses at the country's sole electricity supplier, Korea Electric Power Corp. (Kepco).

In the first three months of this year, Kepco reported a record quarterly operating loss of 7.8 trillion won ($6 billion). In 2021, it also reported a record annual operating loss of 5.9 trillion won.

The government's effort to salvage the troubled energy firm, however, is likely to saddle the corresponding financial burden on consumers and energy-intensive industries.

"Electricity is used in every business and the hike this time will be followed by increased costs in production and services, which in turn will affect private spending," said Ha Joon-kyung, an economics professor at Hanyang University.

For instance, 61 percent of the companies surveyed by the Bank of Korea (BOK), Monday, said they will "respond by raising the prices of their goods."

The higher electricity price will also increase the cost of public services, such as transportation, and workers could seek higher wages amid a decline in their real income.

Under the circumstance, inflation in July and August, may grow more than 6 percent, according to Joo Won, deputy director of the Hyundai Research Institute.

If realized, it will be the highest rate of inflation seen since November 1998 when it reached 6.8 percent in the midst of the Asian financial crisis.

Ha at Hanyang University speculated that annual inflation may rise above 5 percent for the first time since 1998 when it reached 7.5 percent.

Concerning possible solutions to tackle inflation caused by hikes in utility bills, Joo said it may help if the BOK moves faster on the key interest rate.

He stressed that the central bank will have to continue to increase the benchmark rate by 25 basis points or 50 basis points in a preemptive manner to meet market expectations.

The benchmark interest rate was raised three times this year and stands at 1.75 percent, the highest level since the pandemic began. The next rate-setting meeting is scheduled for July 13.

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