Inflation Reaches Highest Level in 7 Years

Last month saw inflation reach 4.9 percent, Korea’s highest in seven years, coupled with a decrease in household spending power, the National Statistical Office said yesterday.

A report on consumer price trends released yesterday said that as the rapid slowdown of the domestic market is expected to cause economic sluggishness in the second half, worry over possible stagflation is rising.

The trade balance posted a surplus for the first time in six months, but exports, the main engine of the Korean economy, is also showing signs of a downturn, including declining shipments to the United States.

Inflation in May was the highest since five percent in June 2001. The rate had remained under four percent in the first quarter this year, going from 3.9 percent in January to 3.6 percent in February and 3.9 percent in March.

The figure rose to 4.1 percent in April and has shown a steeper rise since.

Fueling the high inflation is the soaring prices of raw materials, including those for petroleum, gold and wheat, and domestic prices are feeling the effects a month later.

Oil prices rose 25.3 percent year-on-year last month, with 1.43 percentage points out of the inflation rate of 4.9 percent in May directly linked to oil price hikes.

Of 52 daily necessities that the administration has put price controls on, the prices of 29 items have grown from April. Pork jumped 11.4 percent and detergent rose 7.4 percent, showing that items with a direct impact on the people posted high inflation.

The Bank of Korea also said real gross national income in the first quarter dropped 1.2 percent from the fourth quarter last year due to higher trade losses caused by oil price hikes. This is the largest decline since a drop of 1.6 percent in the first quarter of 2003.

Falling real income caused by import prices rising faster than those for exports resulted in 27.4 trillion won in real trade losses in the first quarter, the largest for a quarter.

With the purchasing power of consumers falling, domestic consumption contribution to GDP growth fell 0.1 percentage point. This means consumption, a pillar of economic growth along with exports, hurt economic growth.

Last month’s trade balance, however, returned to the black for the first time since November last year, recording an estimated surplus of 1.04 billion dollars. The Knowledge Economy Ministry said May exports increased 27.2 percent year-on-year to 39.49 billion dollars, while exports expanded 28.8 percent to 38.45 billion dollars.

Lee Doo-won, an economics professor at Yonsei University, said, “In this macroeconomic situation, the government needs a policy to reduce import inflation by cutting the won-dollar rate and cut taxes directly related to the people’s livelihoods, including that of diesel.”