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Prices shoot up as Korea faces a slower economy

Costs of oil and food leave nation facing highest prices in a decade

May 10,2008
The Korean economy is facing a bout of stagflation with lower economic growth at a time of sharply rising prices, a government report said yesterday.
Producer prices rose the fastest in almost 10 years due to increasing costs of crude oil and agricultural products. The announcement came a day after the Bank of Korea said that economic growth will likely be far less than earlier projected.
“Korea’s economy already peaked and is entering a downward phase,” the Ministry of Strategy and Finance said in a report on the overall economy.
The ministry warned that the economy may further contract.
“There are concerns over further contraction in the economy due to the worsening world economy, growing trade deficit and record high oil prices,” the ministry said.
A state-run think tank made a similar prediction.
“The expansionary phase of the economy stopped at the end of last year and it is now in a slow decline,” the Korea Development Institute said in a report.
Rising international commodity prices are increasing the trade deficit while weakening local currency, which in turn is adding to inflation as weaker won is making imports more expensive.
According to the Korea National Oil Corporation, on Thursday the cost of West Texas intermediate crude oil futures broke the record for the fourth straight day on the New York Mercantile Exchange.
Rising commodity prices led to an increase in producer prices, especially the price of manufactured products. According to the Bank of Korea, producer prices soared 9.7 percent from a year ago in April, the highest increase since November 1998.
Because increases in producer prices translate into hikes in consumer prices down the road, Koreans will soon face steep price increases for goods and services. Consumer prices already jumped 4.1 percent in April from a year earlier, the fastest rate in four years. The country may be in the early stage of stagflation under its classic definition of a period of high and rising inflation.
“By definition, Korea is in the middle of stagflation,” said Jeon Hyo-chan, a senior researcher at Samsung Economic Research Institute. However, he said inflation is not as severe as it was during the stagflation of the 1970s.
Jeon said it is difficult for the central bank to cut interest rates because it would be inflationary, yet without a rate cut, the economy will sputter.
jbiz91@joongang.co.kr


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