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[Editorial] Inflationary pressure

Steep hikes in consumer prices raise need for coherent fiscal, monetary policy

Concerns are being raised over the recent steep rise in the country’s consumer prices, adding to the suffering of households hit by the economic fallout from the pandemic.

South Korea’s consumer prices rose 2.6 percent from a year earlier in July, accelerating from a 2.4 percent on-year gain the previous month, according to data released by Statistics Korea this week.

The country has seen its consumer inflation rate climb more than 2 percent for four straight months since April, with the 2.6 percent hike recorded in May and July marking the highest since April 2012.

What is more worrisome is that the price of daily necessities, including food, clothes and housing, rose 3.4 percent on-year last month, the fastest gain in nearly four years. In particular, the prices of agricultural, livestock and fisheries products jumped 9.6 percent in July following a 10.4 percent increase in June.

Home prices grew 1.4 percent last month, recording the 15th straight monthly increase and the fastest on-year increase since November 2017.

The government has said the pickup in consumer prices is expected to be temporary and to slow down in the third quarter from the April-June period, when inflation grew 2.5 percent.

With inflation continuing to rise, however, it seems difficult to keep the annual consumer price increase below the government-set target of 1.8 percent.

Government officials recently began suggesting the possibility that upward pressure in consumer prices could build up in the coming months. They noted there were upside risks to inflation as weather conditions could worsen due to heat waves and typhoons and oil prices might further rise.

Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs, Monday stressed the need to stabilize prices ahead of the Chuseok holiday in September.

But it is unsure whether the government will be able to curb inflation down the road.

In a meeting with economy-related ministers last month, President Moon Jae-in singled out the rapid rise in the price of eggs and asked for prompt measures to stabilize it. But the price soared 57 percent in July and has shown no signs of letting up anytime soon.

The government’s push for the early implementation of this year’s second supplementary budget worth 34.9 trillion won ($30.5 billion) may add fuel to price hikes. More worryingly, the Moon administration seems ready to draw up yet another spending plan within the year in a move sure to stoke criticism for aiming to help sway voter sentiment in favor of a ruling party candidate in the runup to the presidential election in March next year.

Injecting huge amounts of cash is incompatible with curbing inflation.

The growing inflationary pressure is set to push the Bank of Korea to raise its key policy rate.

In July, the central bank left the benchmark rate unchanged at a record low of 0.5 percent amid the fourth wave of the pandemic. But BOK Gov. Lee Ju-yeol strongly hinted at the time that the central bank would move to tighten its monetary policy.

Market watchers now expect the BOK to increase the key rate by a quarter of a percentage point three times by the end of next year, starting as early as in late August, when its policy-setting meeting is scheduled to be held. BOK policymakers seem to feel the need to take a preemptive action as the US Federal Reserve is expected to undertake the tapering of its monetary policy in October.

The envisioned rate hikes would increase debt-servicing burdens on many households saddled with mounting debt. The country’s household debt has hovered around 1,700 trillion won, coming to nearly 100 percent of its gross domestic product.

A collapse in the property market could burst the debt bubble, rattling the country’s financial market. Korea’s economy could be trapped in stagflation, in which the inflation rate goes higher while the economic growth rate slows, with unemployment remaining steadily high.

Stabilizing prices to prevent such a predicament requires a coherent implementation of fiscal and monetary policies. With Moon’s five-year term set to expire in May, his administration needs to rein in its fiscal recklessness to lessen burdens to be shouldered by its successor and the younger generations.

By Korea Herald (koreaherald@heraldcorp.com)
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