Short-term stagflation looms large: economists

Finance minister urges all-out efforts to curb prices


The government’s inflation fight appears to be losing its grip on energy, service and staple food prices set to rise further on uncertainties abroad.

The inter-ministerial efforts to fight food inflation such as cutting food tariff and increasing crop supplies in the past few months have largely been offset by increase in import costs.

Public utility and transportation costs, kept frozen under joint effort by relevant ministries, are scheduled to rise in the second half of the year. Economists warn the continued inflationary pressure could coincide with a slowdown in growth and result in stagflation.

“There could be short-term stagflation this year especially as the momentum from the economic recovery is slowing down,” Lee Sang-jae, an economist at Hyundai Securities said.

Finance Minister Bahk Jae-wan and Bank of Korea Governor Kim Choong-soo on Friday noted that inflation will linger on for a considerable amount of time. The central bank hiked the benchmark interest rate by a quarter percentage point for a third time this year to 3.25 percent, resuming the inflation fight.

“Some say that price-stability measures have a limit in curbing price hikes in the market, but the government, for its part, still has to do its best by mobilizing all possible policy measures and make efforts to cushion any external shocks,” Bahk said at his first inflation fight meeting since taking office last week.

“Inflation is an issue that affects everything from real income and the domestic demand base to national competitiveness, employment and the ability to cope with external shocks.”

The public utility costs set to rise are to correct the growing deficit by major public corporations plagued by rising raw material costs. The Seoul metropolitan government is set to raise subway fares by 300 to 400 won after freezing them for more than four years. The local governments of Incheon, Busan, Daejeon and Ulsan have also been considering a raise of 10 percent in the second half of this year.

Oil prices rose above $101 a barrel Thursday after the Organization of the Petroleum Exporting Countries failed to agree on output supply policy a day earlier. The group controls about 35 percent of global crude output. It expects world oil demand to outpace supplies later this year by the widest margin since 2007.

Consumer prices rose 4.1 percent in May from a year earlier, exceeding the central bank’s target range of 2 to 4 percent for the fifth consecutive month.

Gross domestic product grew a revised 1.3 percent in the January-March period, falling short of 1.4 percent estimation made in April.

The producer price index for May, a gauge indicating future consumer prices, dropped for the first time in 11 months.

The Finance Ministry has toned down its expectation for inflation rate, marking a shift from earlier this year when it pushed for a 5 percent growth under 3 percent inflation.

“The economy is witnessing a continued improvement in employment with inflation, including farm price hikes easing slightly,” the ministry said Thursday in its monthly assessment of economic conditions.

“But other indicators such as production, consumption and investment are somewhat slowing.”

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