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[Editorial] ‘Sticky’ inflation

Consumer inflation back above 3%, with few effective tools to tame prices

By Korea Herald

Published : March 8, 2024 - 05:30

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South Korea’s inflation rose back to over 3 percent in February due to the high prices of fresh food and energy, meaning both the Bank of Korea and the Yoon Suk Yeol administration face a bewildering situation where there are few quick fixes to tame rising prices.

Consumer prices, a key measurement of inflation, rose 3.1 percent on-year last month, according to the data released by Statistics Korea on Wednesday. It was a discouraging development for policymakers who had expected inflation to slowly stabilize after falling to the 2 percent range in January for the first time in six months.

Inflation climbed to 3.8 percent in October last year and then began to drop at a steady pace for three months: 3.3 percent in November, 3.2 percent December and 2.8 percent in January.

Fueling the overall price increases are agricultural, livestock and fishery products that jumped 11.4 percent on-year last month -- the everyday food items that immediately affect how people feel about rising prices.

The combined prices of 18 major fruits soared 41.2 percent last month, marking the biggest increase in over 32 years. The price of apples skyrocketed 71 percent on-year, which in turn pushed people to seek alternatives such as tangerines, whose price roared by a whopping 78.1 percent.

While fresh fruits could be seen as an optional item, it is difficult to remove essential vegetables entirely from daily food menus. The related vegetable price index rose 12.2 percent last month on-year, the highest level in 11 months.

To rein in rising fruit prices, the government has earmarked a record budget of 60 billion won ($44.9 million) for farm produce discount programs in March and April. But experts say that unless the government lifts import bans on eight major fruits, including apples, prices of farm produce will remain elevated.

The cost of of dining out went up 3.8 percent last month, registering the smallest gain since October 2021, but showing no sign of dropping for nearly three years.

All this means that many Korean households come under intense price pressure whether they eat at home or dine out.

The February figures also renewed concerns that Asia’s fourth-largest economy has fallen into a trap where prices do not adjust as quicky to supply and demand, as well as to monetary policy of keeping interest rates high -- a phenomenon known as “sticky inflation.”

It is indeed a sticky situation, as the Bank of Korea is no position to raise rates -- its key inflation-taming tool -- since the market has been expecting a rate cut aimed at helping rekindle growth momentum for the sluggish economy.

The central bank is expected to take into consideration the US Federal Reserve Board’s rate-setting moves in assessing the proper timing of its own rate cuts. At least for now, the BOK is unlikely to take an aggressive move since Fed Chair Jerome Powell said Wednesday that interest rate cuts are only likely “at some point this year,” adding that the Fed would take its time as progress on inflation is “not assured.”

The fundamental problems of inflation cannot be ignored for too long. Prolonged high prices could eat into the value of savings and earnings, weaken purchasing power and dampen corporate investment.

Even though the Yoon administration is aware of inflation’s negative effects, it still hesitates to tackle some of the major inflation factors such as the extension of tax cuts on oil products and delays in electricity rate hikes, especially ahead of the parliamentary election in April.

The latest figures indicate that Korea is yet to pull out of the “three highs” -- high interest rates, inflation and energy prices. Policymakers must place full focus on stabilizing prices in their fiscal and monetary moves.