Oil prices, economic sag buffer inflation risks

Korea’s central bank said yesterday that inflation risks are neutral, leading the country’s annual inflation to grow less than its median target of 3 percent until next year.

However, a separate report from Goldman Sachs warned that agflation in the global economy has the potential to push up consumer prices.

The Bank of Korea said in its biannual report on inflation that decreases in oil prices and a slowing economy are easing pressure on consumer inflation.

“Inflation expectations are likely to gradually stabilize unless additional price shocks crop up,” said Kim Jun-il, a deputy governor at the BOK.

Last month, the BOK revised down its 2012 inflation forecast to 2.7 percent from an earlier estimate of 3.2 percent, citing falls in oil prices.

The BOK assessed that downside and upward risks to consumer inflation are deemed as neutral to its growth path.

The bank said subduing global demand and falls in raw material costs are likely to serve as downside risks to consumer prices.

Meanwhile, free state-run child care programs are estimated to drive down the growth of consumer prices by 0.53 percentage point monthly and 0.44 percentage point annually, the BOK said. An absence of such policies could raise the annual growth of consumer prices to slightly above 3 percent for this year. Yet when the programs end in March next year, it could put some upward pressure on inflation eventually, it added.

Additionally, upward risks are also lurking like geopolitical risks from Iran, possible jumps in agricultural product prices and a planned hike in public utility charges, it added.

Surging international grain prices are likely to push up inflation down the road, Goldman Sachs said in a report released yesterday. A global jump in prices of wheat, soybeans and other grains is expected to lead to rising food prices in Korea and jack up its consumer inflation rate by up to 0.4 percentage point between late this year and early next year.

Yonhap