Prices Rise, Won Sinks, Stoking Inflation Fears

Sharp increases in education costs and agricultural and fishery prices pushed up consumer prices in March, the government said Friday. The slide in the won's value continued, sparking concern that price increases will continue.

Consumer prices rose 0.6 percent in March over February, and by 4.4 percent year-on-year, the third straight month of plus-4 percent annual price growth. An official at Finance Ministry's consumer policy bureau said, "Our analysis indicates that the price increases are due largely to the rise in college tuitions and kindergarten fees and prices of produce and poultry. We believe the prices will stabilize in the coming months."

The won continued to fall against the U.S. dollar, dropping below 1,330 won at one point in Friday trading, the lowest level since October 1998. Trading closed at 1,327.5 won, down 8.9 won from Thursday.

The won's persistent weakness prompted observers to predict that annual price-level increase will surpass the government's target in the 3-percent range. A macroeconomic analyst at the Korea Institute of Finance said, "The won is expected to remain weak throughout the first half, and the price level may likely be pushed over the 4 percent mark."

The government may soon be put in the position to choose between price stabilization or economic stimulus. The Finance Ministry and the Bank of Korea appear to be on opposite sides. The central bank governor, Chon Chol-hwan, concerned about the effect of further interest rate reduction, recently indicated that priority must be placed on stabilizing the exchange rate and utility prices.

The Finance Ministry disagrees. "The price increases can be attributed to higher oil prices and exchange rates," a ministry official said. "A lower interest rate will not be unduly detrimental."

Private analysts downplayed the conflicting concern. "A price level increase of 4 or 5 percent is something the economy can handle," a Samsung Economic Research Institute analyst said. "We shouldn't be so concerned about the price level so that we miss the chance to restart the economy."

by Song Sang-hoon