Farm Prices, Low Won Drive Inflation to 5.3%

Despite a slowing economy, Korea's consumer prices continued to rise last month at a rate higher than had been projected by the government.

The Ministry of Finance and Economy said Monday that the index jumped 5.3 percent year-on-year in April, the highest level in 29 months. It rose 0.6 percent from the previous month and is up 2.5 percent in the first four months of the year.

The ministry attributed the increase mainly to agricultural, livestock and fisheries products and to higher import prices due to the decline in the value of the won.

The core inflation rate, which excludes agricultural and petroleum products, remained relatively stable, up 4.5 percent year-on-year in April and up 0.3 percent month-on-month.

The producer price index rose for an 11th consecutive month in April and stands 3.3 percent higher than a year ago and 0.2 percent than in March.

If the trend continues, experts say, the government may have to revise its inflation target when it draws up economic plans for the latter half of this year.

Still, the government sounded optimistic. "Inflation will slow," said Oh Kap-won, director of the ministry's Welfare and Consumer Policy Bureau, "be-cause agricultural, livestock and fisheries prices, public service charges and education fees will fall in the months to come, and domestic oil prices will also drop." Thus, he argued, in-flation in the second half of the year will sink below 4 percent.

Although the January-April inflation was driven by hikes in agricultural prices and public service charges, a weakened local currency should not be neglected, ex-perts said.

According to the ministry's analysis, the annual inflation rate goes up by an additional 1.5 percentage points for every 10 percent drop in the won's value against the U.S. dollar. Given that the won lost some 15 percent of its value this year, the effect on inflation would be about 2 percentage points.

"Even if the won-dollar exchange rate stays at the current level, it is still too high, making it difficult for the central bank to meet the inflation target," said Chung Myeong-chang, a research director at the Bank of Korea.

by Song Sang-hoon