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(3rd LD) S. Korea's inflation at 24-year high in June; sharp rate hike in offing

Economy 10:19 July 05, 2022

(ATTN: ADDS more info in paras 10, 22-23)
By Kim Soo-yeon

SEOUL, July 5 (Yonhap) -- South Korea's consumer prices rose at the fastest clip in nearly 24 years in June due mainly to soaring energy costs, data showed Tuesday, fanning expectations of a sharp rate hike this month.

Consumer prices soared 6 percent last month from a year earlier, accelerating from a 5.4 percent on-year spike in May, according to the data from Statistics Korea.

It marked the sharpest inflation rate since a 6.8 percent jump in November 1998, when South Korea was in the midst of the 1997-98 Asian financial crisis.

Consumer prices rose above 2 percent -- the central bank's inflation target over the medium term -- for the 15th straight month in June.

South Korea faces growing inflationary pressure, as crude oil and other commodity prices rose due to the protracted war between Russia and Ukraine, and global supply disruptions. Demand-pull inflation has also increased amid the economic recovery.

The statistics agency said inflation is expected to stay in the 6 percent range for the time being and a possibility of 7 percent cannot be excluded at one point.

"If the current trend continues, annual inflation could exceed the 4.7 percent forecast" by the finance ministry, Eo Woon-sun, a senior Statistics Korea official, told reporters.

This photo, taken July 4, 2022, shows gas and diesel prices at a filling station in Seoul. (Yonhap)

Mounting inflationary pressure lent support to the prospect that the Bank of Korea (BOK) will further hike the policy rate this month.

Some experts forecast the BOK to conduct an unprecedented "big-step" rate increase of 50 basis points at the July 13 policy meeting to tame inflation.

Last week, a high-ranking BOK official told Yonhap that the possibility of a big-step rate hike will increase should consumer prices grow 6 percent or higher.

The BOK has hiked the key interest rate five times -- all by a quarter percentage point at a time -- since August last year to 1.75 percent.

The June inflation was mostly driven by rising prices of petroleum products and personal services.

Last month, prices of petroleum products jumped 39.6 percent on-year due to high fuel costs. South Korea depends mainly on imports for its energy needs.

A recovery in demand and the lifting of major virus curbs also pushed up prices of personal services, which climbed 5.8 percent. The costs of dining out also soared 8 percent, the most in nearly 30 years.

Core inflation, which excludes volatile food and oil prices, climbed 3.9 percent on-year last month, the sharpest gain since February 2009.

In June, prices of daily necessities -- 141 items closely related to people's daily lives, such as food, clothing and housing -- spiked 7.4 percent on-year, the highest growth since November 1998.

People shop for groceries at a discount chain store in Seoul on July 4, 2022, amid high inflation. (Yonhap)

The government rolled out a set of measures to stabilize consumer prices, including an additional cut in fuel taxes in a bid to ease the burden from high energy prices.

In July, the country expanded fuel tax cuts to a legal cap of 37 percent from the previous 30 percent in a measure to be effective until the end of this year.

But the latest hikes in electricity rates and natural gas prices are feared to stoke inflation. Despite inflation concerns, the government raised electricity rates for the third quarter as the state-run power firm suffered a widening loss due to high energy costs.

The South Korean currency's sharp weakness could add upward pressure on inflation as it boosts import prices. The won has fallen more than 8 percent against the U.S. dollar so far this year amid the Federal Reserve's aggressive rate hikes.

South Korea has faced the risk of stagflation, a mix of slowing growth and high inflation, due to heightened external economic uncertainty.

The BOK held an anti-inflation meeting Tuesday and predicted that consumer prices will grow at a fast clip "for the time being" due to supply disruptions, increasing demand amid eased social distancing rules and recent utility price hikes.

The central bank also underscored the importance of keeping a lid on rising inflation expectations and preventing inflation from staying high through the so-called wage-price feedback.

In June, the finance ministry sharply raised its 2022 inflation outlook to a 14-year high of 4.7 percent, while lowering its economic growth estimate to 2.6 percent.

The BOK put its 2022 growth forecast at 2.7 percent and expected consumer prices to rise 4.5 percent this year.

Global credit appraiser S&P Global Ratings on Monday forecast South Korea's inflation to jump 5 percent in 2022.

sooyeon@yna.co.kr
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