Deflation concern building as prices increase at slowest pace in years

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Deflation concern building as prices increase at slowest pace in years

Prices are rising at their slowest pace in two and a half years, with concern now building that the economy may be heading toward deflation.

According to Statistics Korea on Tuesday, consumer prices in March increased 0.4 percent on year. That is lower than the 0.5 percent rise in February and the third consecutive month below 1 percent.

Inflation in March was at its lowest level since July 2016, when consumer prices rose 0.4 percent. Core inflation, which excludes food and beverage and petroleum prices, hit 0.8 percent, its lowest level since February 2000.

The price weakness comes as facility investment shrinks, consumption drops and unemployment rises. Weakness in the real estate market has also weighed on inflation following efforts by the Moon Jae-in administration to cool the market.

“The biggest reasons for the slow growth are the prices of petroleum and vegetables,” said Kim Yun-sung, director of price statistics at Statistics Korea. “Additionally, there was slow price growth in the service sector.”

She said the international price of crude oil fell between November and February, adding that government policy to lower fuel prices contributed to the lower petroleum goods prices last month. She also said vegetable prices were down largely because of warmer weather, which contributed to the increase in fresh produce supply.

Low inflation in recent months has been deepening concern that Korea is now entering a long-term slowdown similar to the one Japan experienced starting in the early 1990s, when its asset bubble burst. Comparisons to Japan’s lost decade are being made.

Petroleum goods prices dropped 9.5 percent in March year on year, which lowered the overall inflation rate by 0.43 percentage points. Vegetable prices fell 12.9 percent, bringing down the overall consumer price by 0.21 percentage points.

Service inflation rose 1.1 percent, helping raise overall inflation by 0.58 percentage points, but that was the slowest increase in five years. The last time service industry inflation rose 1.1 percent was in February 2014.

Observers are increasingly concerned about the development of a vicious cycle, whereby falling consumer and asset prices, especially real estate, encourage a cutback in spending which, in turn, feeds back and further dampens sentiment.

“It is still difficult to talk about the overall economy at this point,” said price statistics division director Kim. She speculated that inflation will rise in the coming months as the government policy that lowered fuel prices ends in May. She also noted that international crude prices have recently been on the rise.

The statistics agency last month projected that inflation will bounce back to 1 percent as the increase in taxi fares and the rise in international crude prices contribute to higher consumer prices.

If the current trend continues, it won’t be easy to hit the central bank’s goals for the year.

The Bank of Korea earlier this year projected 2019 inflation at 1.4 percent, 1.2 percent in the first half and 1.5 percent in the second half. The core inflation was expected to come in at 1.4 percent, with a 1.2 percent increase in the first half.

Last week, a statistics agency report showed that output, investment and consumption in February all fell.

Industrial output fell for the first time in five months, facility investment declined the most since 2009 and even consumption, which was the government’s last line of defense in keeping the economy going, fell 2 percent, its first decline in nearly a year and a half.


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