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Extreme weather, pandemic fuel rising inflation

Central bank pressured to hike rate as inflation picks up speed faster-than-expected

A health worker at a makeshift COVID testing center in western Seoul wipes sweat off his face on a scorching July afternoon. (Yonhap)
A health worker at a makeshift COVID testing center in western Seoul wipes sweat off his face on a scorching July afternoon. (Yonhap)
South Korea’s consumer prices gained a higher-than-expected 2.6 percent on-year in July, data showed Tuesday, with the government citing shortage of livestock and agriculture goods due to worsening climate condition as a key catalyst.

The consumer prices grew at more than 2 percent for the fourth consecutive month in July, continuing to exceed the Bank of Korea’s 2 percent inflation target and hitting a record high since beginning of the year, according to Statistics Korea. The price index had gained 2.4 percent on-year the previous month.

Core inflation, which excludes volatile food and oil prices, hit a record high in nearly four years, gaining 1.2 percent in the cited period.

The latest data goes against the government’s earlier projections that consumer prices would begin losing speed and start dropping below the 2 percent-mark in the second-half of the year.

Alongside a surge in price of petroleum products, which gained 19.5 percent on-year in the same period, buoyed by surge in global oil prices, Statistics Korea pointed to extreme weather in recent months behind the growing inflationary pressure.

“Recent livestock losses due to the searing heat wave and lackluster harvest of agricultural and farmed goods due to last year’s long monsoon season, and frequent typhoons followed by a cold wave worked as factors behind the latest data,” Eo Woon-sun, a senior statistics agency official, told reporters.

The price of agricultural, livestock and fisheries products gained 9.6 percent on-year, and prices of eggs jumped 57 percent, with the government continuing to cite lack of supplies due to avian flu. But the price of agricultural, livestock and fisheries products slowed from a 10.4 percent gain observed in the previous month.

As Korea continues to struggle with the fourth-wave of the COVID-19 virus, recording daily cases around 1,000 since early July, the scorching heat wave has been dampening the public mood. More than 860 people were reported to have suffered heat-related illnesses from May 20 to end-July, more than double the cases reported throughout the same period last year, recent data from the Korea Disease Control and Prevention Agency showed. The number of deaths from heat illnesses was tallied at 12, compared with nine last year.

Despite woes stemming from the extreme weather and the pandemic, the overall recovery in exports has been driving the economy forward, which ironically have been heightening inflationary pressure.

South Korea‘s exports jumped 29.6 percent on-year in July to a record $55.4 billion and extending gains to a ninth consecutive month, recent government data showed.

The government is projected to face further risks tied to inflationary pressure in the upcoming months, with the Chuseok holidays scheduled from Sept. 20 to 22 this year and its latest cash handout program set to spur further demand.

Eyeing the signs of inflation, the nation’s central bank faces a dilemma in picking the timeframe to carry out a rate hike, with its chief strongly signaling a shift towards a more hawkish policy by the end of the year.

The Bank of Korea’s decision to slash its benchmark interest rate to a record-low of 0.5 percent last year has been a key reason behind the nation’s snowballing household debt, as investors have been rushing to lenders to take advantage of the ultra low-rate trend. The borrowed money has been flowing into the nation’s heated housing market, which the government has failed to cool down despite adopting more than 20 sets of related measures.

Housing prices grew 1.4 percent last month, gaining for the 15th consecutive month and seeing the sharpest on-year rise since November 2017.

By Jung Min-kyung (