How is core inflation driving up consumer prices in Korea?

The government has put price stabilization at the top of its economic agenda this year but inflation shows no signs of abating. The severity of the situation is happening due to high core inflation, which excludes volatile food and oil prices.

Consumer prices rose 4.7 percent in July, with core inflation the main culprit. Prices of agricultural products and oil tend to rise sharply once they are on the high side but rapidly slow once weather conditions normalize and the international raw material market stabilizes.

This does not apply, however, to prices of housing rentals, public utilities and individual services, which can rise with no particular upward force and seldom drop once they are up.

The government said it will minimize hikes in public utility charges and investigate price fixing in individual services, but whether these measures will help calm prices remains unknown.

○ Main cause of surging prices

Statistics Korea said Monday that core inflation rose 3.8 percent in July from the previous month, a modest figure compared to that of fresh food prices (9 percent).

The situation is better, however, compared with early this year. Fresh food prices surged 30.2 percent in January due to abnormal weather conditions, but dropped thereafter as vegetable supply normalized.

By contrast, the core inflation rate rose to 3.8 percent in July from 2.6 percent in January. The upward trajectory was maintained for six months except for April. Price hikes were seen in most categories including housing rent (4.7 percent), beauty parlors (8.2 percent) and dining out costs for Korean’s main entrée pork belly (17.3 percent).

The problem is that core inflation tends to spill over from one region or retailer to another. In public transportation fees for example, prices first rose in small municipalities early in the year and spread to metropolitan cities such as Daegu in July. Seoul is also planning to raise public transportation fees.

When restaurants, beauty parlors and travel agencies raise prices, others tend to follow suit. The government will strengthen “housewives” price monitoring and encourage voluntary price stabilization efforts by retailers through, for example, the Korea Restaurant Association.

Such a policy is like knocking the door of a deaf man’s house, however, as retailers are suffering from rising production costs.

○ Base effect to reduce prices

"High inflation in July was caused by the rising prices of agricultural, livestock and fisheries products. Prices will likely stabilize below 4 percent from September,” said Yoon Jong-won, head of the Strategy and Finance Ministry`s economic policy bureau.

The ease in inflation will stem from a high base effect from last year, however. After remaining stable at the 2-percent range up to August last year, consumer prices grew 3.6 percent in September and to 4.1 percent in October, when cabbage prices skyrocketed.

Due to the high base effect, inflation from September onwards this year will be lower than in preceding months.

The government recently raised this year`s inflation forecast to 4 percent but experts are skeptical. To reach that level, consumer price growth must hover below 3.5 percent for the next five months, which is almost unrealistic as of now.

“Given the still high oil prices and uncertainty in farm prices, the government’s target could be difficult to achieve,” said Kwon Soon-woo, director of macroeconomics research at Samsung Economic Research Institute.

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