[Editorial] Sticky inflation

Concerns linger over volatile inflation following a rise in prices in September

South Korea’s consumer prices, a key gauge of inflation, rose 3.7 percent in September from a year earlier, marking the highest on-year increase in five months, amid worrisome signs of additional volatility in prices.

Some experts raise the possibility that the Korean economy might fall into a trap of “sticky inflation,” referring to a situation where prices do not adjust quickly or smoothly in response to changes in supply and demand, leading to persistent inflation.

It is too early to conclude that higher prices would “stick” at this level toward the end of the year, but prices for a host of key items, ranging from subway fares to raw milk for dairy products, have been raised this month.

The Yoon Suk Yeol administration continues to hold the view that prices will stabilize soon, but this optimistic outlook is filled with uncertainty as higher oil prices and an increase in wages could force more companies to raise prices.

Statistics Korea data showed Thursday that consumer prices accelerated in September due to higher oil costs and price hikes of certain farm goods. Core inflation, which excludes volatile food and energy prices, rose 3.3 percent on-year in September, expanding at the same pace as the previous month.

Oil prices have gone up at a sharp pace in recent months partly due to output cuts by oil exporters such as Saudi Arabia, with some experts forecasting they could hit $100 a barrel. Softening the blow, oil prices fell last week amid worries about slower fuel demand that could eclipse the OPEC+ decision to maintain oil output cuts.

The overall trend of consumer prices this year calls for caution in connection with the possibility of sticky inflation. Consumer inflation stood at 5.2 percent in January before steadily falling to 3.7 percent in April, 3.3 percent in May and 2.3 percent in July. The continued fall in prices in the first seven months had signaled inflation might be finally under control.

But consumer prices surged 3.4 percent in August, and gained more speed last month, reflecting high-flying oil prices. The question is whether this upward trend will continue in a way that dampens the already lackluster spending of consumers.

Finance Minister Choo Kyung-ho on Thursday attributed the rise in consumer prices to higher oil prices, while projecting prices would stabilize in October.

“Service prices are stabilizing and core inflation, which reflects price trends, is just above 3 percent,” Choo said. “Beginning in October, when seasonal price factors are softening, inflation is expected to stabilize again.”

The Finance Minister said the government will “proactively consider” extending a tax cut on fuel consumption for another two-month period in a bid to help grapple with volatile global oil prices. The government’s 25 percent discount on the consumption of gasoline and 37 percent discount on the consumption of diesel were set to expire this month.

Kim Woong, deputy governor of the Bank of Korea, also said prices will return to the softening phase from October, projecting the 3 percent range toward the end of December. “But there are uncertainties in projecting the course of inflation, such as oil prices, the exchange rate and the economic growth both at home and abroad,” Kim said.

In contrast to the government’s optimistic view, prices for key items are on the rise. The basic fare for the subway in the Seoul metropolitan area has gone up by 150 won ($0.11) to 1,400 won starting Saturday. Since it is the first time that public transportation fares in the capital have been raised in eight years since 2015, commuters are expected to feel the impact from the fare hike.

Reflecting the higher price of raw milk, companies raised prices for dairy products on Oct. 1. Beer prices are also set to be raised by the average of 6.9 percent from Wednesday.

Given that additional price hikes are planned for public transport, services and major consumer products, policymakers are urged to take more steps to keep prices under control and strengthen their monitoring activities for sudden price changes in the market.

By Korea Herald(khnews@heraldcorp.com)