Inflation fifth lowest in OECD for April, but risks remain

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Inflation fifth lowest in OECD for April, but risks remain

Clothes are displayed at a discount store in Seoul on Wednesday. Prices of clothes and shoes in May rose 8 percent on year to log the highest rate of increase in 31 years, according to Statistics Korea. [NEWS1]

Clothes are displayed at a discount store in Seoul on Wednesday. Prices of clothes and shoes in May rose 8 percent on year to log the highest rate of increase in 31 years, according to Statistics Korea. [NEWS1]

 
Korea is one of the few countries that were able to tackle inflation with relative success, coming in with the fifth lowest inflation for April among Organisation for Economic Cooperation and Development (OECD) member states. But experts say it’s too early to ring the victory bell, pointing to rigid core inflation and uncertainties such as possible oil production cuts by petrostates and potential increases in public utility bills.  
 
Korea’s inflation in April came in at 3.7 percent, fifth from the bottom among the 35 OECD countries that announced their inflation, according to the intergovernmental organization’s report released Tuesday. Four countries kept their inflation below that of Korea — Switzerland at 2.57 percent, Greece at 3.04 percent, Japan at 3.5 percent and Luxembourg at 3.69 percent. The other 30 members all logged inflation above 4 percent.
 
Inflation in Korea was half of the OECD average of 7.37 percent, and also lower than the Group of 20 average of 6.5 percent.
 
Korea’s relative success comes in part from its preemptive approach to monetary tightening, which led to a slowdown in economic growth in return for disinflation. The Bank of Korea began hiking interest rates in August 2021 to battle inflation, seven months prior to when the Fed’s 10 consecutive rate hikes started in March last year.
 
“Korea began taking a monetary tightening approach half a year earlier than other countries,” the central bank said in its economic outlook report in May. “Assessments on the Korean economy have been divided after its inflation dropped to the 3 to 4 percent range following the [on-quarter] GDP contraction in the fourth quarter of last year.”
 
A high percentage of loans on floating rates played a role in weakening inflation as well. Some 75 percent of household loans were on floating rates, as were 65 percent of corporate loans, based on the loan balance of deposit banks as of November.
 
Excessive floating rate loans were assessed as a risk that begets sluggish consumption under rising interest rates by the Financial Services Commission during a task force meeting held on May 25. A decrease in consumption is a common factor for disinflation.
 
Core inflation still lingers above the central bank’s goal of 2 percent inflation, however. Core inflation, which gauges the underlying trend in consumer prices by excluding volatile food and energy prices, stood at 3.9 percent in May, barely moving from March and April’s core inflation of 4 percent. Inflation in general has been descending over the same period, coming in at 4.2 percent in March, 3.7 percent in April, and 3.3 percent in May.
 
Experts say such a trend is likely to continue.
 
“Core inflation will slow down at a relatively moderate pace due to a strong upturn in service prices,” said Lee Jeong-hoon, an analyst at Eugene Investment and Securities.
 
The consumer price for household products and services rose 6 percent on year in May, miscellaneous goods and services by 6.4 percent and the cost of eating out by 6.9 percent. The upward pressure remains in other areas as well, with clothing and footwear rising 8 percent on year, the highest in 31 years, on the back of increased outdoor activity.
 
“Inflation may fall steadily through mid-year to a 2 percent range but is expected to fluctuate [in the latter half] to around 3 percent by the year-end,” said Kim Woong, deputy governor at the Bank of Korea.
 

BY HA NAM-HYUN [sohn.dongjoo@joongang.co.kr]
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