Korea's inflation soars to 24-year high, weighing on economy

Eo Woon-sun, a senior Statistics Korea official, gives a press briefing on inflation in June at Government Complex Sejong, Tuesday. Yonhap

6% inflation in June raises expectations of BOK's 'big step' hike

By Yi Whan-woo

Consumer prices in Korea last month jumped at the fastest pace in nearly 24 years, putting more pressure on the country to heighten measures against inflation amid growing fears of stagflation.

According to Statistics Korea, Tuesday, the country's consumer prices rose 6 percent in June from a year earlier, marking the sharpest rise since November 1998 when it stood at 6.8 percent in the midst of the Asian financial crisis.

Inflation is mainly driven by a spike in global oil prices and other external risks that remain out of the government's control. As a result, it is probable that the inflation figure, which has been setting new highs for months, will possibly climb above 7 percent in July or August.

The prices of industrial goods and services combined were responsible for more than four fifths of the price increase in June.

Among industrial goods, petroleum product prices surged 39.6 percent year-on-year, which was the highest in 24 years. Specifically, the price of diesel went up by 50.7 percent, gasoline by 31.4 percent, kerosene by 72.1 percent and liquefied petroleum gas (LPG) for cars by 29.1 percent.

Such a rise comes as oil prices skyrocketed in the wake of a prolonged war in Ukraine, as seen from the price of benchmark Dubai crude rising to $115.7 a barrel in June from $108.3 a barrel in May.

Concerning personal services, eased social distancing rules perked up demand and pushed prices up by 5.8 percent, the highest seen since May 1998.

The prices of daily necessities _ 141 items closely related to people's daily lives, such as food and clothing _ grew 7.4 percent to mark the highest rise since November 1998.

Accordingly, core inflation, which excludes the volatile prices of food and oil, rose 3.9 percent, displaying the sharpest gain seen since February 2009.

Under the circumstance, the statistics agency speculated that inflation can rise faster to hit the 7 percent range in the coming months.

"The upward inflationary pressure persists despite speculation that an upward trend in global oil prices may slow down," Eo Woon-sun, a senior Statistics Korea official, said during a press briefing. "Inflation, therefore, may stay in the range of 6 percent, while it should not be ruled out from going above 7 percent."

The Ministry of Economy and Finance voiced a similar view.

"The challenging circumstance concerning prices can last for the time being," it said, pointing out that bottlenecked supply chains of energy, grains and commodities are getting worse as the Ukraine crisis drags on.

The Bank of Korea (BOK) added to the gloomy forecast on inflation, saying, "Inflation could rise above 7 percent in the third quarter" due to monsoon rains and other factors that can heavily affect the prices of agricultural products, livestock and fisheries.

It was the first time that the BOK hinted at the possibility of inflation rising to the 7 percent range.

President Yoon Suk-yeol presides over a weekly Cabinet meeting at the presidential office in Yongsan District in central Seoul, Tuesday. He vowed to lead an emergency meeting on economic issues that so far has been led by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho amid heightened inflation. Yonhap

In a weekly Cabinet meeting, Tuesday, President Yoon Suk-yeol said he will preside over meetings to check on issues concerning the people's livelihood.

He said he will also preside over emergency meetings on economic issues. The meetings so far have been led by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho.

The president stressed that the government has been taking anti-inflationary measures to lessen the financial burden on the public, including a fuel tax cut by the maximum cap of 37 percent and lowered tariffs on 13 imported products whose supplies have been unstable, among others.

The market expects the BOK to take an unprecedented "big step" on the benchmark interest rate by hiking it by half a percentage point in its upcoming rate-setting meeting, July 13.

Choo came up with a controversial idea recently when he requested big business conglomerates to freeze workers' wages to prevent the pace and size of the inflationary cycle getting more serious.

But even so, inflationary pressure is too strong to offset the government's efforts and that slowing growth will be unavoidable, said Park Chong-hoon, the head of economic research at Standard Chartered (SC) Bank Korea.

"Inflation will go on regardless of all possible countermeasures and will only stop at the expense of a further slowdown in growth," he said, referring to concerns that the BOK's tightening of the monetary policy collides with the finance ministry's massive stimulus package to help pandemic-hit businesses.

"Consumer price growth is influenced by external risks and the only thing the government can do is to lessen pain, and cannot make it go away completely," he said.

Regarding Choo's idea to freeze wages, Park said the government's intervention in the market can rather provoke public resentment. He referred to a negative response from the labor circle which protested that such a freeze will lead to a sharper decline in real wages.