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Korea’s inflation goes negative for the first time

Gov’t insists demand is not so weak, so deflation isn’t upon us  PLAY AUDIO

Oct 02,2019
Inflation went into the red last month for the first time ever as exports fell for the 10th consecutive month, underscoring the economy’s worsening woes.

According to government data released Tuesday, consumer prices last month fell 0.4 percent on year - far lower than the official inflation target of 2 percent - while exports dropped 11.7 percent in the same period.

It was the first recorded negative inflation since data started being recorded in its current form in 1965. Consumer prices recorded very low growth throughout the year, remaining under 1 percent since January and hitting zero - rounded up from minus 0.038 percent - in August.

Statistics Korea blamed a base effect from high prices in agricultural goods last year. Prices of agricultural goods fell 8.2 percent last month from the previous year. It also cited a 5.6 percent drop in petroleum prices, emphasizing that the negative inflation was temporary and not based on a lack of demand, which could lead to deflation - and a shrinking economy.

Core inflation, which removes such seasonal factors, was also lower at 0.6 percent compared to the near 1 percent level maintained earlier this year.

“Even if the base effect is removed, the weak direction of prices is undeniable,” wrote Yeo Hyun-tai, an analyst at Korea Investment & Securities, in a report. “There is a lack of inflationary pressure in terms of demand.”

The slide into negative territory heightens fears of deflation - a sustained decline in prices, indicating a slowing economy.

The government dismissed the idea. “Deflation usually occurs with delayed consumption due to declining prices,” said Vice Finance Minister Kim Yong-beom during a government meeting. “However, the retail sales index has continued to record growth and rose by 3.9 percent in August.”

Kim added that consumer prices will likely decline for up to three months due to the supply factors, in line with the statistics agency’s expectations for the index to rise by just under 1 percent at the end of the year.

Exports remained weak at just $44.7 billion last month compared to $50.7 billion in the same month the previous year, a near 12 percent decline.

The Ministry of Trade, Industry and Energy explained that difficult trade conditions, including the ongoing U.S.-China conflict, as well as declining semiconductor prices led to a fall in outbound shipments.

Exports to China fell by 21.8 percent, while shipments to the United States declined by 2.2 percent.

Semiconductor exports fell 31.5 percent to $8.5 billion, although they increased 23.6 percent by volume.

According to the Trade Ministry, a single 8-gigabyte DRAM chip cost $3.26 last month, a 55.8 percent drop from last year.

Even if semiconductor figures are excluded, overall exports declined by 5.3 percent due to a 17.6 percent drop in petrochemical products, also caused by a drop in crude oil prices.

The weak economic data has weighed on Korea’s GDP growth outlook for this year.

A recent report from the Asean+3 Macroeconomic Research Office said it expects Korea’s economy to grow by 2.1 percent this year, lower than the Finance Ministry’s target range of between 2.4 and 2.5 percent.

Bank of Korea Governor Lee Ju-yeol said last week that the country will probably not meet the central bank’s forecast of 2.2 percent growth.

Finance Minister Hong Nam-ki has called for calm.

“I gravely believe that it is difficult economically, and downward risks are growing. However, I do not agree that [we face an] economic crisis,” Hong told lawmakers on Monday.

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


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