[Editorial] Taming inflation

Stronger, realistic policy measures needed to rein in surging prices, avoid a looming crisis

High-ranking government officials are often quick todraw up as rosy an outlook as possible but slow to admit a looming crisis. But there are some exceptions, such as the comment made by President Yoon Suk-yeol on Monday.

Yoon admitted that there are few fundamental solutions to the current economic challenges as countries across the world are raising interest rates to rein in rising inflation.

In a striking move to tame inflation, the US Federal Reserve hiked its benchmark rate by three-quarters of a percentage point to a range of 1.5 percent to 1.75 percent last Wednesday, marking the biggest increase since 1994. The so-called “giant step” came after US inflation rose to 8.6 percent in May, the fastest pace since 1981.

The European Central Bank said it would raise interest rates for the first time in 11 years next month to control inflation in the eurozone, which hit a record 8.1 percent in May.

Inflationary pressure is building up everywhere due to higher demand, supply chain disruptions, rising energy and commodity prices, and the protracted Russia-Ukraine war.

To battle runaway inflation, a growing number of central banks are raising interest rates, closely watching the Fed’s move, amid growing concerns about side effects of aggressive rate hikes.

South Korea is not immune to such powerful external headwinds. The country’s consumer prices jumped 5.4 percent on-year in May, the fastest rise in almost 14 years, following a 4.8 percent spike in April. In an endeavor to tame inflation, the Bank of Korea hiked its policy rate by a quarter percentage point to 1.75 percent in May.

The BOK is now expected to raise the rate in its forthcoming rate-setting meetings, especially given inflation is accelerating further. On Tuesday, the central bank said in a report that Korea may see its highest inflation since 2008 when the figure was 4.7 percent, due largely to the mismatch between higher demand and a tight supply. The updated projection came after the BOK had already revised up its inflation forecast from this year from 3.1 percent to 4.5 percent last month.

“There have been quite a few changes to the inflation situation,” BOK Gov. Rhee Chang-yong told reporters Tuesday. “Now that inflationary pressure at home and abroad is likely to continue, the country could be stuck with high inflation should we fail to control inflation expectations properly.”

The question is whether the South Korean government is doing enough to keep inflation expectations from spiraling higher. On Sunday, it unveiled a set of measures to deal with inflationary pressure, such as extending tax cuts on fuel consumption and doubling income tax deduction rates for public transit use to 80 percent.

Finance Minister Choo Kyung-ho said the government will freeze public utility rates including railway and postal service fees in the second half of this year and minimize rate hikes for electricity and gas bills.

But the issue of electricity rates, which directly affects the loss-making state-run energy company Korea Electric Power Corp. is no easy task. The Finance Ministry was set to announce the rate hike details Tuesday, but suddenly delayed the schedule, apparently dissatisfied with Kepco’s proposal for a 2.7 percent hike from the third quarter.

One reason is that consumer prices, which are expected to stay over 5 percent in the coming months, could surpass 6 percent should the government accept Kepco’s request. After all, piecemeal hikes of the electricity rate would not help fix structural problems at Kepco, which incurred 7.78 trillion won ($6.03 billion) in operating losses in the first quarter of this year.

Critics claim the new measures unveiled by the government are far from sufficient to tame inflation, much less in resolving Kepco’s woes. Even though there are few fundamental solutions, Yoon and policymakers should draw up stronger steps in a bid to steer the nation away from a bigger crisis.

By Korea Herald(khnews@heraldcorp.com)