Hike in public utility charges to worsen inflation and economy for Korea in Q3

[Photo by Yonhap]

Rises in public fuel utility rates in the third quarter have become another factor in fanning inflation to the levels in South Korea unexperienced since the wake of Asian financial crisis of 1998 and dampening domestic demand due to higher across-the-board costs.

Deputy prime minister for economy and finance Choo Kyung-ho has forewarned headline inflation rate hovering above 6 percent during the summer period. The consumer price index jumped 5.4 percent in May and the uninterrupted gains in the producer price index suggests consumer prices heading higher in coming months.

“Producer prices are translated onto consumer prices,” noted Kim Jung-sik, economics professor at Yonsei University, who agreed the headline CPI gain rising above 6 percent, a level last seen in November 1998.

The inflation rate has accelerated amid upward spiraling in energy, commodity, and grain prices from protracted war between Russia and Ukraine. The deepening weakening in the Korean won has made imports costlier for Korea that heavily relies on imports for commodities for consumption as well as production for exports.

With the government finally yielding to lift the cap on utility fees, production and services cost inevitably would go up higher.

Electricity, gas, and water bills jumped 9.6 percent on year, the steepest gain since related data was compiled in January 2010, already in May. Power bill surged 11 percent in May after a rise in cost in April was reflected and city gas charges also climbed up 11 percent after a spike in April and May. The rise in public utility contributed 0.32 percentage points to the 5.4 percent consumer price gain.

[Photo by Yonhap]

Korea Electric Power Corporation (KEPCO) on Monday announced to raise fuel adjustment fee by 5 won ($0.004) for the third quarter. The hike is expected to add 1,535 won more to electricity cost to a family of four that uses monthly average of 307 kilowatt hour electricity.

The hike impacts industrial sites more.

Last year, KEPCO sold 291,333 gigawatt hour (GWh) electricity for industry use. A 5 won rise per 1 kWh would lead to a 1.46 trillion won increase in industry electricity fees to affect the operation income.

Samsung Electronics is the biggest consumer of power, which purchased 1.41 terawatt hour worth of industrial electricity from KEPCO last year. A simple calculation shows that Samsung Electronics would have to pay 92.1 billion won more from July.

Despite the impact on prices and economy, the government no longer can hold off raises in power charge.

The state utility monopoly logged 7.8 trillion won in losses in the first quarter alone. The third-quarter increase however won’t likely help much as it argued it would need minimum raise of 33.6 won in the fuel cost unit to cover its losses.

“A rise in power bills leads to a rise in costs for businesses,” said Ryu Sung-won, head of industrial policy at Federation of Korean Industries. “There will be more burden on manufacturing and root industries that consume more electricity.”

Shares of KEPCO fell 4 percent to 21,900 won in morning session Tuesday as investors remained pessimistic about the company’s outlook.

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