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S. Korea, no time to relax at U.S. CPI fall

Posted November. 12, 2022 07:12,   

Updated November. 12, 2022 07:12


The October consumer price index of the U.S. fell to 7.7%, down from June’s 9.1% rate, which was the highest in four decades. As consumer prices across the U.S. slowed their upward march for four months in a row, hopes that the Fed might control the pace of increasing rates and expectations about the soft-landing of the economy are growing. This has led to increases in the New York stock market and KOSPI, which went up more than 3 percent. The won-dollar exchange rate in the Seoul foreign exchange market closed at 1,318 won per dollar, 60 won down from the preceding trading day.

Although the global economy is painting a rosy picture upon the CPI announcement, this sentiment wouldn’t last long. Fed Chairman Jerome Powell last week signaled that the Fed would prefer to slow down the pace of rate rises on the one hand, but on the other hand, he said rate hikes would go on longer and higher. The U.S. interest rates are expected to rise to 6 percent from the current 4 percent. Russia’s war with Ukraine has been driving up energy prices and is expected to pass this winter. As the world’s third-largest cryptocurrency exchange, FTX, is in a crisis, concerns are rising that the crisis could spill over to the financial sector and bring about a Lehman Brothers moment in the crypto market.

The export-driven Korean economy could struggle longer than expected as the global economy is starting to slow down. The Korea Development Institute (KDI) has forecasted that the nation’s economy will post growth of only 1.8 percent next year, below the potential inflation rate of 3.2 percent. It is an unprecedently low growth rate since the oil crisis, the Asian Financial Crisis, the Global Financial crisis, and the first year of the Covid-19 pandemic.

In addition, the turmoil of Legoland Korea theme park in Chuncheon and the Korea Electric Power Corporation’s massive corporate bond issuance are straining the capital market, making it difficult for companies to finance. A series of bankruptcies of SMEs and construction companies could occur as they can only access short-term funds. The possibility of overborrowed households going belly up is increasing as the interest rate for housing mortgage loans and Jeonse loans exceeded 7 percent. Adding to the matters, China, Korea’s biggest trade partner, is falling into recession, with its export decrease in 29 months.

For the government and the Bank of Korea, which had been arguing that inflation would peak in October, the U.S. CPI decrease is a welcoming relief. However, there is no such signal that Korea’s inflation is controlled as October’s inflation was higher than September’s. An electricity rate hike is inevitable next year due to the massive deficit of KEPCO, while workers strongly ask wage increases to offset inflation concerns. Crude oil prices could go up at any time. The government and the central bank should be on alert and closely watch rapidly-changing situations.