Producer price inflation lets up

Producer price inflation eased last month to the lowest in more than a year as demand has fallen amid falling commodity prices as the global economy slows.

Meanwhile market watchers projected that the central bank will likely freeze the nation’s key borrowing rate as global economic outlook is worsening amid high inflationary pressure.

According to the Bank of Korea, producer price index was 4.3 percent higher than a year ago. This is the lowest since September 2010 when producer price on-year growth was at 4 percent. Additionally last month’s producer price was lower than November’s 5.1 percent. Producer price has been easing after hitting last year’s peak at 6.6 percent.

December’s slower growth was largely contributed to the sharp drop in vegetable and fruit prices. Vegetable producer price fell 12.8 percent from the previous year while fruit prices plummeted 25.6 percent on-year.

“Harvests of vegetables and fruit were bad due to unfavorable weather conditions such as the typhoon in 2010, but the prices of these products fell at the end of last year as weather conditions were mildly favorable,” said a BOK official.

“The price growth for industrial goods eased as demand shrunk from fear of an economic slowdown while the international raw material price retreated.”

Industrial good prices grew 5.3 percent from a year earlier, a drop from 6.7 percent posted in November.

However, concerns still linger as the average producer price last year was nearly twice of that of 2010. The average producer price in 2011 was 6.1 percent whereas in 2010 it was 3.8 percent. The central bank is currently under heavy public pressure as it is criticized for failing to contain consumer prices last year.

Last month Statistics Korea announced that consumer price in 2011 averaged 4 percent, which barely made the government’s maximum limit.

However, when applying the previous version the average consumer price grew 4.4 percent.

The government since November applied a new revised consumer price system by extracting gold prices while implementing communication prices. The new version lowered the consumer price.

As consumer pressure continues amid fear of deepening economic stagnation, market observers project the central bank, during the monetary policy committee meeting later this week, will freeze the borrowing rate and eventually lower it in the coming month.

“We expect the Bank of Korea to keep the base rate on hold at 3.25 percent at its policy meeting on Jan. 13,” said Yoon Eun-hye, Standard Chartered economist.

“The worsening global economic outlook and the continued slowdown in activity data lower the chance of a rate hike, while a rate cut also looks unlikely considering the still-elevated headline and core inflation and the significant pick-up in December exports,” Yoon added. “Our base scenario remains that the BoK will cut rates by 0.25 percentage points in the second quarter.”

By Lee Ho-jeong [ojlee82@joongang.co.kr]