Electricity and Gas Rates Frozen Next Year... Considering Setting Inflation Control Target at 2% Range

KEPCO and Korea Gas Corporation 'Freeze' Despite Accumulated Deficits

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The government will freeze electricity and city gas rates in the first half of next year. This is a preemptive response considering that demand-side inflationary pressures may increase further during the COVID-19 recovery process. It is also interpreted as taking into account global supply chain disruptions and rising international raw material prices.

According to the Ministry of Economy and Finance on the 12th, the government is considering declaring a freeze policy on central public utility rates such as electricity and city gas when announcing next year's economic policy direction around the 20th of this month.

Despite the accumulated deficits of public institutions such as Korea Electric Power Corporation and Korea Gas Corporation amid the surge in global raw material prices, the government plans to extend the policy of no public utility rate hikes at least until the first half of next year.

Public utility rates such as electricity and city gas serve as raw materials for various goods and services, so increases in these rates often act as a catalyst for other price hikes. Also, as these are among the few prices that the government can control in a market economy system, they serve as a channel to confirm the government's commitment to price stability.

A government official said, "With global supply chain disruptions and rising international raw material prices, demand-side pressures are also increasing, and many companies are expected to raise prices of goods and services starting early next year," adding, "If the government allows public utility rate hikes, which it is virtually the only authority to control, the inflationary trend could become uncontrollable." Since price increases are passed on to final consumer prices, it is believed that the low-income economy could be hit in the future.

The government allowed an electricity rate hike last October for the first time in eight years but blocked any further increases. The policy is to make additional hikes difficult for the time being next year as well.

There were strong demands to raise city gas rates considering the rising international prices of crude oil and liquefied natural gas (LNG), but the government has maintained a freeze policy until the end of the year and plans to continue this stance next year.

The government also intends to suppress increases in local public utility rates such as subway, city bus, taxi fares, water and sewage charges, and volume-based waste bag fees as much as possible.

Although local public utility rates are autonomously decided by local governments, the Ministry of the Interior and Safety plans to use various available measures to maintain the freeze policy.

Government Considers Setting Inflation Rate Management Target at Around 2% Annually

Additionally, the government is considering setting the consumer price inflation management target at around 2% annually next year.

The government is expected to propose an inflation target higher than 2.0% for the first time since the Bank of Korea set the price stability target at 2.0% in 2016.

This indicates that the government is taking the inflation situation, driven by rising prices of oil, raw materials, and personal services, very seriously.

Currently, the Ministry of Economy and Finance is reviewing a plan to raise the inflation management target for next year significantly from the existing 1.4% to above 2.0% in the upcoming economic policy direction announcement.

The Bank of Korea has maintained the price stability target at 2.0% since 2016. It adjusted the target from 2.5?3.5% during 2013?2015 to 2.0% for 2016?2018 and has continued to apply 2.0% without setting a time limit since 2019.

The government has never proposed an inflation management target exceeding the Bank of Korea's 2.0% price stability target in the economic policy directions and economic outlooks announced twice a year since 2016.

The highest targets were 1.9% for 2017 presented in the second half of 2016 economic policy direction and in the 2017 second half and 2018 economic policy directions.

The government's consideration to propose an inflation management target above 2.0% in next year's economic policy direction reflects the recent unusual inflation situation.

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