Deflation worries are overblown, KDI argues

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Deflation worries are overblown, KDI argues

Consumer prices will start to rise toward the end of the year, a state-run think tank said, downplaying deflation fears following a report of zero inflation last month.

The Korea Development Institute (KDI) said Sunday that “temporary factors” were responsible for the country’s inflation rate of 0.0 percent in August - actually minus 0.038 percent, but rounded up - blaming seasonal factors, such as the high base resulting from a spike in agricultural product prices last year caused by a record-hot summer.

Agricultural product prices plunged 7.3 percent in August from a year earlier, while prices for private services rose 1.8 percent.

While the KDI acknowledged lower overall demand, it forecast a rise in the consumer price growth rate later in the year.

“Headline inflation slid to 0 percent on shrinking demand,” read the report. But given that core inflation was higher, a rebound is likely late this year when temporary factors fade.

Core inflation is inflation without food and fuel prices, which tend to be volatile.

Last month’s headline inflation figure was a turning point after consumer price growth remained in a range between 0.4 percent and 0.8 percent throughout the year.

The think tank explained that as the core inflation rate remained at similar levels last month, consumer prices would increase later in the year.

Core inflation was 0.8 percent in August, compared to 0.9 percent in July.

The think tank’s analysis was in line with the central bank’s comment last week that inflation would rise to the 1 percent range from next year. The KDI remained concerned about the broader economic situation.

“The Korean economy remains stagnant on weakening internal and external demand,” said the report. “Both retail sales and facilities and construction investment descended, and exports stayed weak.”

Retail sales, an indicator of consumption, fell 0.3 percent in July from the previous year, while facilities investment declined 4.7 percent on year.

Global trade uncertainties weighed on Korea’s exports as outbound shipments last month dropped 13.6 percent to $44.2 billion from the same period the previous year.

The trade surplus in August was at $1.72 billion compared to $6.82 billion a year ago.

The worrying economic indicators have led the government to increase spending.

The Ministry of Economy and Finance announced last week that 1 trillion won ($837 million) of investment from state-backed companies and institutions, originally planned for 2020, will be made this year.

The government also proposed a record-high budget of 513.5 trillion won for next year.

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