Shopping Feels Daunting... Inflation Concerns Persist Amid Retaliatory Spending and Rising Raw Material Prices

Consumer Price Index Up 3.3% Year-on-Year
Green Onions and Eggs Surge Sharply… Government Announces Supply Measures and Support Plans
Rising Inflation Pushes Government Bond Yields Higher

[Asia Economy Reporters Kim Hyun-jung (Sejong), Kim Eun-byeol, Jang Se-hee] Inflation concerns are mounting as the consumer price index rose over 2% for two consecutive months due to a low base effect from last year's low inflation and supply instability in some agricultural, livestock, and fishery products. The government expects the factors driving price increases to ease in the second half of the year, but the surge in demand for face-to-face services following COVID-19 vaccinations and the possibility of further raw material price hikes cannot be ruled out. In particular, government bond yields are also rising, adding another variable to inflation.

According to the 'May Consumer Price Trends' released by Statistics Korea on the 2nd, the consumer price index for last month rose 3.3% compared to a year ago, marking the largest increase since August 2017 (3.5%). The consumer price index is calculated based on the prices of 141 items with high purchase frequency and expenditure weight, essentially reflecting the perceived inflation rate.

◆ Soaring Basket Prices Sensitive to Low-Income Households = Among the items comprising the consumer price index, food prices rose 4.7% compared to last year, while non-food items increased by 2.5%. Green onions (130.5%), apples (60.3%), garlic (53.0%), and eggs (45.4%) led the upward trend. Among non-food items, diesel (25.7%), automotive LPG (24.5%), gasoline (23.0%), and apartment maintenance fees (7.3%) saw significant price increases.

In response to the recent inflation surge, the government announced plans to increase imports of certain items and expand government support for raw materials. On the same day, Lee Eok-won, First Vice Minister of Strategy and Finance, chaired the 'Price-Related Vice Ministers Meeting and Policy Review Meeting' at the Government Complex Seoul and stated, "We will import 50 million plus α eggs in June and extend the emergency tariff quota measures until the end of the year." The government also plans to supply an additional 20,000 tons of rice for processing, release discounted non-ferrous metals, and expand the supply of rebar as countermeasures against international raw material price fluctuations. To prepare for rising service prices, measures include ▲ managing public utility fees such as electricity and gas ▲ further lowering loan interest rates for raw material purchases ▲ and providing discount coupons for agricultural and livestock products to alleviate living expenses.

[Image source=Yonhap News]

◆ Forecast for Slower Price Increases in the Second Half… Consumption Recovery as a Variable = The government forecasts that the annual inflation rate will not exceed 2% this year. While the low base effect from last year's low inflation may persist for some time, it is expected that the supply shocks in agricultural, livestock, and fishery products, which were major upward factors, will ease in the second half. Vice Minister Lee said, "Agricultural and livestock products, one of the main factors driving inflation in the first and second quarters, will slow to normal levels as the harvest season for major crops arrives and considering the base effect from the third quarter of last year." Regarding crude oil and raw materials, he explained, "International oil prices are expected to stabilize in the $60 per barrel range by the third quarter, and other raw materials are also expected to recover supply-demand balance as global supply expands, according to most analysis agencies."

However, risks remain, such as worsening supply conditions for agricultural, livestock, and fishery products due to future abnormal weather and the possibility that consumption recovery following vaccine distribution could push service prices higher. Vice Minister Lee assessed, "Risks to inflation conditions in the second half include worsening supply conditions for agricultural and livestock products due to typhoons, monsoons, and other abnormal weather, delays in resolving raw material bottlenecks contrary to expectations, and the impact of consumption recovery from vaccine distribution on service prices." He added, "If some of these risks materialize, there is a possibility that economic agents' inflation expectations could be higher than the actual economic situation."

Lee Eok-won, First Vice Minister of Strategy and Finance, is delivering opening remarks at the Vice Ministers' Meeting on Prices and Policy Review held at the Government Seoul Office in Jongno-gu, Seoul, on the 2nd. Photo by Kim Hyun-min kimhyun81@

◆ Government Bond Yields Also Surge = As consumer price inflation rises sharply, market interest rates are also showing unusual movements. At 10:40 a.m. on the day, the 10-year Korean government bond yield was trading at 2.199%, up 1.3 basis points (1 bp = 0.01 percentage points) from the previous day, marking a three-day consecutive increase. The previous afternoon, the 10-year government bond yield hit a new high of 2.186%, the highest since November 26, 2018 (2.167%), and the intraday trading rate was even higher.

The 5-year government bond yield was 1.733%, and the 3-year yield was 1.214%, showing slight increases from the previous day but not yet surpassing previous highs. The recent rise in government bond yields began as expectations grew that the Bank of Korea might accelerate the normalization of monetary policy faster than anticipated.

The possibility of nationwide disaster relief payments is also fueling the rise in government bond yields. To prepare a second supplementary budget, the government will inevitably have to issue deficit bonds, and as issuance volume increases, bond prices fall and yields rise. This would increase the burden on households, businesses, and the government, which have increased debt to cope with the COVID-19 crisis.

Experts also foresee the possibility of further inflation increases due to a rebound in consumption after COVID-19. Professor Kim Sang-bong of Hansung University’s Department of Economics said, "Once the COVID-19 situation eases soon, demand shocks could occur in addition to supply shocks," adding, "If the first round of COVID-19 vaccinations is completed in the second half and overseas travel becomes active, prices could rise further." He also expressed concern, saying, "Considering the rise in the consumer price index, which closely reflects perceived inflation, low-income households may reduce spending on non-essential items."

This content was produced with the assistance of AI translation services.