The Korea Herald

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소아쌤

Price controls expected to have limited effect

By 김주연

Published : Jan. 14, 2011 - 12:38

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Seoul’s fresh plans to control inflation announced Thursday would provide only temporary relief to the market as authorities could do only so much to stabilize price volatilities aroused by overseas supplies, economists said.

A pan-government task force headed by the Finance Ministry unveiled a package of action plans mobilizing all administrative power to secure supply of crops and freeze public utility bills.

It also plans to increase the supply of new apartments earlier than planned and rent out unsold properties of state-run construction companies to low- to middle-income people.

“But the recent price jumps in the country were not necessarily caused by higher demand. We have problems in supply and in such cases the government can only do so much,” Kang Joong-koo, an economist at LG Economic Research Institute told The Korea Herald.
Customers shop for agricultural produce at a Seoul discount store on Thursday. (Yonhap News) Customers shop for agricultural produce at a Seoul discount store on Thursday. (Yonhap News)

Authorities plans to increase tariff cuts from the planned 67 items and increase its release of the reserved crops from the national granary during the March-April period when supply tends to be short.

Kang said such steps would help lower import prices and increase supply in the short run but emphasized that there is a limit to what the government can achieve.

“Soaring food prices and a kimchi shortage from last year were due to the bad weather and rising import costs. The market should recognize that they are temporary causes and understand that the inflationary pressure is here to stay,” Kang said.

Most of the daily necessities with price hikes are imported products or use ingredients from overseas. They include sugar, dishwashing rubber gloves, and tomato sauce which jumped 38.7 percent, 33.1 percent and 17.8 percent each. The price of flour increased by 13.5 percent in the recent weeks, pressuring baked goods and confectionaries to rise accordingly.

Surging oil and commodities prices are also fanning inflation expectations in the country. Oil prices rallied to a two-year high Wednesday in London, peaking at $98.85.

“Apart from temporary causes, long-term causes such as growing emerging market demand for energy and commodities would continue to exert inflationary pressure for the trade-dependent country,” Kang said.

He assessed the announcement, added with the Bank of Korea’s unexpected rate hike by 25 basis points earlier in the day, are already the best tools a government could deploy in such price volatilities.

The BOK raised its benchmark interest rate twice last year to curb prices after the economy pulled off almost six percent growth in 2010. The rate now stands at 2.75 percent.

The central bank, which keeps its inflation target at between 2 and 4 percent for the 2010-2012 period, expects inflation to advance to 3.5 percent this year from 2.9 percent in 2010.

By Cynthia J. Kim (cynthiak@heraldcorp.com)