Inflation stuck below 1 percent for six months

Inflation remained below 1 percent in June for the sixth consecutive month, increasing worries that Korea is facing deflation.

Statistics Korea reported Tuesday that consumer prices rose 0.7 percent last month from the same month the previous year. Compared to May, consumer prices declined 0.2 percent.

The statistics agency explained that a fall in global oil prices and a slowdown in consumption were responsible for the low figure last month.

“Because of the drop in global oil prices compared to last year and reductions to the fuel tax, the downward trend continued,” said Kim Yun-sung, price statistics director at the agency. “Sluggish consumption had a partial influence and we are seeing price rise under 1 percent.”

According to the agency’s data, prices of petroleum products fell 3.2 percent in June compared to the previous year. Dubai crude oil prices fell to $61.8 per barrel last month compared to $73.6 a year earlier.

The core consumer price index, which factors out seasonal or temporary factors, also remained under 1 percent, rising just 0.7 percent last month from the previous year.

The agency added that the government’s welfare policies - such as an expansion of health care coverage - also contributed to the low rise in the consumer price index.

Prices for public services fell 0.2 percent last month despite a 13.4-percent rise in inter-city bus fares as mobile phone bills fell 3.4 percent and in-patient hospital payments saw a decline of 1.7 percent.

Experts and think tanks expressed concerns over an economic slowdown possibly leading to deflation.

“Due to the sluggish economy, there is low demand and this has led to the low inflation rate,” explained Kim Jung-sik, an economics professor at Yonsei University. He believes that worries about deflation are premature.

Private think tank Hyundai Research Institute described the situation since May as “quasi-deflation” as the country’s inflation rate remained under 1 percent throughout this year.

“With domestic consumption and investment all slowing along with difficult employment conditions, household consumption is unable to expand and this downward pressure on inflation in terms of demand is the cause of the recent trend of low inflation,” said the institute in May.

In another report last month, the think tank predicted that the trend could continue for the rest of the year.

“The possibility of deflation is low in the domestic economy, however […] there should be efforts to prevent further slowdown in consumption and investment,” said the think tank.

The state-owned Korea Development Institute (KDI) forecast this year’s consumer prices to rise by 0.7 percent compared to the previous year, well below the central bank’s target of 2 percent.

“As our economy’s growth slows down, [consumer prices] are expected to maintain a low growth rate,” said the KDI in a report in May.

The think tank also cut its outlook for the country’s gross domestic product (GDP) growth this year to 2.4 percent from 2.6 percent.

BY CHAE YUN-HWAN [chae.yunhwan@joongang.co.kr]