Euro woes fuel inflation fears

Euro woes fuel inflation fears

By Kim Tong-hyung Confidence in the Korean economy has evaporated fast on bad industrial and consumer data as well as evidence that inflation may not be coming under control, despite policymakers’ claims. And that was before the European financial crisis lurched into a perilous new phase and decimated stock markets along the way. As leaders in Europe scramble to assure a future for their precarious single currency and duck from a full-blown financial crisis some say would be reminiscent of the 1930s, the action plan for officials in Seoul seems to read, wait, pray and fret. Helplessness has set in at the halls of the Ministry of Strategy and Finance in recent months as it struggles to cope with the disastrous vortex of subduing economic activity, spiraling debt and unemployment. And now there are signs that inflation is creeping back up on higher household bills for fuel and utilities, an alarming development for policymakers who find their options in monetary policy severely limited. The drama in Europe has once again exposed Korea as a one-trick export pony with the sinking Korea Composite Stock Price Index (KOSPI) and sliding value of the won being the skid marks left by foreign investors who continue to run from the country screaming. The recent exchange rate movement has policymakers concerned about the impact of dearer imports when the elevated costs of living are already putting an acute squeeze on the living standards of low-income earners. Fuel prices could be heading up soon as Korea braces for a possible halt in imports of Iranian crude oil following tightened sanctions by the European Union. And the Korea Electric Power Corporation (KEPCO), the country’s debt-ridden power monopoly, says it can no longer afford to keep higher costs from being passed on to consumers. In a recent meeting of economic policymakers, Strategy and Finance Minister Bahk Jae-wan admitted to fears that the eurozone debt crisis and tension in the Middle East could have inflation peaking again. ``With the world economy facing greater uncertainties, there are also increasing worries over price stability here coming from major items of consumption such as fuel, food and utilities,’’ he said. ``We need to take a closer look at the factors from inside and out that pose risks to our economy.’’ The Bank of Korea (BOK) kept its policy rate at 3.25 percent for the 11th consecutive month in May as the depressing combination of subduing economic activity and high prices continue to force interest-rate setters to sit on their hands. Headline inflation was measured at 2.5 percent in April from a year earlier, representing a 21-month low. However, it was hard to take the lower figure as an indicator of price stability when the base of comparison is the outrageous 2011, when inflation was measured above 4 percent for most of the year as consumer prices lost all sense of gravity. The reading for last month was also influenced by temporary factors, such as increased government support for daycare centers and school meals, which are cosmetic effects that will wear off soon. The public’s inflation expectations over the next 12 months remained in the upper-3s for May. Policymakers consider consumer expectations of long-term price trends as important because inflation often proves to be a self-fulfilling prophecy. If people believe inflation will continue to rise, businesses will carry on raising the prices of products and services to worsen price instability and make it harder to tame. ``The level of inflation expectations is still a concern, and should the cost of electricity and other utilities go up, the price pressures will become even greater as people will be anticipating a rise in services costs as well,’’ said Lee Jun-yeop, an economist from the Hyundai Research Institute (HRI). With the central bank in a self-induced coma, the country’s fight against inflation has depended on government price controls and its ability to bully companies out of elevating price tags. With the finance ministry choreographing the action and the Fair Trade Commission (FTC) and National Tax Service (NTS) deployed as enforcers, the government has suppressed businesses from raising the prices of their products and services, resisting criticism that their measures are running against the limits of acceptability. But with the parliamentary elections already in the books and the clock ticking toward the presidential vote in December, it appears that the lame-duck administration will have a tough time extending its ``whack-a-mole’’ strategies. Already, a number of firms in the retail, food and services raised the prices of their products, while municipalities discuss raising fares for mass transit and the cost of other public services.