Gov`t unlikely to meet 4-pct. annual inflation target

Inflation in August rose 5.3 percent from a year earlier, the largest in three years. Even if prices do not rise over the remaining four months of the year, average inflation this year will hit 4.4 percent, more than the government target of 4 percent.

According to Statistics Korea Thursday, the consumer price index in August grew 5.3 percent year-on-year, the highest since 5.6 percent in August 2008. Since 2000, Korea has seen inflation rise 5 percent six times in May and June 2001 as well as June through September 2008.

Core inflation excluding volatile farm and oil prices gained 4 percent year-on-year, a 28-month high since 4.2 percent in April 2009.

Inflation surged due to the soaring prices of gold, agricultural products and rental houses stemming from lack of supplies.

With vegetable prices growing a whopping 31.8 percent year-on-year, the price of farm, livestock and fisheries goods soared 13.3 percent overall from a year earlier.

Hot pepper powder saw the largest growth at 40.3 percent, followed by sweet potatoes at 34.5 percent and Chinese cabbage at 32.2 percent.

In the service sector, lack of rental housing fueled inflation. The price of jeonse, or the renting of a home with a lump sum deposit, rose 5.1 percent year-on-year, the largest growth since March 2003 (5.3 percent). Growth of monthly rent house was 3 percent, the largest in 15 years since May 1996 (3 percent).

With public utility charges rising 1.4 percent on the back of an increase in electricity rates and individual service costs growing 3.4 percent, inflation in the service sector grew 3.1 percent year-on-year.

With gold rising sharply, the price of gold rings grew 29.1 percent. The price index of industrial goods gained 7.1 percent due to soaring prices of kerosene (24.3 percent), diesel (15.8 percent) and gasoline (13.4 percent).

Despite soaring prices, the government will stick to its annual inflation target of 4 percent as it expects that prices will stabilize after September. Basic communication fees, which have significant influence over inflation, will drop 1,000 won (93 U.S. cents) and prices of farm, livestock and fisheries goods, the biggest cause of inflation, will stabilize as the end of heavy rain late last month improved crop conditions.

The “base effect” will also help prices drop after September. Last year, inflation stabilized at the 2-percent level through August, but soared to 3.6 percent in September and 4.1 percent in October. This year is expected to see the same pattern.

Vice Strategy and Finance Minister Im Jong-ryong said, “The inflation rate in September will be between the upper 3 percent and the low 4 percent,” adding, “Fighting inflation isn`t easy, but we`ll do our best over the remaining months to attain our goal.”

Despite such optimistic prospects, many say the government has failed to meet its inflation target. The average inflation rate of the first eight months this year was 4.5 percent. So to meet the target of 4 percent, the government must keep inflation at 3 percent on average for the remaining four months.

This is unlikely, however, because core inflation showing long-term price trends has exceeded 4 percent and the expected inflation rate that triggers service sector inflation reached 4.2 percent in August, the highest in 30 months.

Shin Min-yeong, head of the economic research team at LG Economic Research Institute, said, “Consumer prices in August rose more than expected,” adding, "As jeonse prices continue to rise and core inflation remains high, the annual inflation target of 4 percent is unlikely to be met."

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