The Korea Herald


[Editorial] Upward risks

Consumer prices may go up again amid lingering worries about ‘sticky inflation’

By Korea Herald

Published : Aug. 4, 2023 - 05:31

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South Korea’s consumer prices slowed to 2.3 percent in July from a year earlier -- the lowest level in 25 months -- but concerns linger about a possible spike in the coming months due to volatile domestic and international factors.

Statistics Korea on Wednesday announced that the country’s consumer prices, a key gauge of inflation, rose 2.3 percent last month, compared with the 2.7 percent in June, thanks largely to lower oil prices.

For economic policymakers, the latest figures are good enough to hold an optimistic outlook, especially considering the downward trend of inflation this year. After hitting 5.2 percent in January, consumer prices have continued to decline in the past six months.

Given that the country’s consumer prices surged 6.3 percent in July last year, the 2.3 percent growth last month may be taken as a clear sign that inflation has been contained and is now edging toward the Bank of Korea’s midterm target.

But a closer look at several developments indicates that things are not all that rosy yet. For starters, core inflation, which excludes volatile food and energy prices, remained elevated at 3.3 percent on-year in July, though it is lower than a 3.5 percent rise recorded in June.

The problem is that food and energy prices are currently showing signs of instability, which can translate to higher numbers in prices. Other key prices such as transportation and electricity rates can be raised further, adding to more pressure on consumer prices.

More important is the rising disparity between the headline inflation and the rise in the prices of everyday items residents pay. Lunch prices remain high, daily food items at the supermarket are also pricey, and small business owners come under increasing pressure from steadily rising operation costs such as the higher prices of raw materials and utility fees.

Some experts call the phenomenon “sticky inflation,” in which prices on certain consumer goods do not change much.

Another fact to consider is that the growth pace of inflation has indeed slowed this year, but it is still in a growth phase. Given that consumer prices jumped 6.3 percent in July last year, the additional 2.3 percent growth means we're not out of the woods yet. In other words, prices are still going up on many fronts.

Lower oil prices helped the country achieve a lower inflation growth last month. But this positive effect may weaken as top oil exporters Saudi Arabia and Russia earlier announced supply cuts for August, amid fears of an economic slowdown dampening fuel demand. To shore up the sluggish the oil market, Saudi Arabia said it would extend its voluntary oil output cut in August.

Saudi Arabia’s move came on top of a broader OPEC+ deal to cut supply into 2024 in a bid to boost flagging oil prices. Russia also plans to reduce its oil exports this month. It remains to be seen whether oil prices will continue to be at a low level despite the supply cut by top exporters.

The scorching heat wave, meanwhile, is boosting the prices of certain vegetables in the local market. As a result of heavy rain and scorching temperatures, the retail prices of spinach and lettuce doubled in a month, while the prices of other essential food items have been on the rise. In addition, the basic price of raw milk used for dairy products is set to be raised from October, raising concerns about what is called “milkflation.”

Equally worrisome is that public transportation costs will rise. The basic fares for subway and buses in Seoul will go up by 150 won and 300 won starting in October and August, respectively. It is the first public transportation fare hike in the capital since June 2015. Other local administrations are set to follow suit.

Some experts warn that given that July’s consumer prices benefited from the base effect, inflation could rebound to over 3 percent from August. Economic policymakers must closely monitor the price spikes of key items and extend support measures to stabilize prices and bolster fragile consumer sentiment.