[Weekly Review] Inflation Hits 14-Year High... Mounting Trade Deficit Adds to Challenges

Last Month's Inflation Rate at 5.4%... Highest in 14 Years Since 2008
Consumer Price Index Rises 6.7%... Closer to Perceived Inflation
Impact of High Oil Prices and Agflation... Expected to Peak in June-July
Trade Deficit Already at $7.85 Billion... Faster Than Financial Crisis
President Yoon Expresses Concern... "We Are in the Typhoon Zone"

May Inflation Rate at 5.4%, Highest in Nearly 14 Years
(Seoul=Yonhap News) Reporter Park Dong-joo = On the afternoon of the 3rd, citizens are shopping at Namdaemun Market in Seoul.
The consumer price inflation rate for May surpassed the 5% mark, soaring to 5.4%, the highest in nearly 14 years. 2022.6.3
pdj6635@yna.co.kr
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[Asia Economy Sejong=Reporter Lee Jun-hyung] The domestic consumer price inflation rate has surged into the 5% range for the first time in about 14 years. There are expectations that the inflation rate in the second half of this year could reach the 6% range for the first time since the 1998 foreign exchange crisis. Due to the ripple effects of global supply chain instability, the trade deficit is also rapidly increasing, raising concerns that the 'twin deficits'?deficits in both the current account and fiscal balance?may become a reality.

According to Statistics Korea on the 4th, the consumer price index last month was 107.56, marking a 5.4% increase compared to the same period last year. The inflation rate hitting the 5% range was last recorded in August 2008 (5.6%) during the global financial crisis, about 13 years and 9 months ago. This indicates that the domestic inflation trend is unusually severe.

The living cost index, which closely reflects perceived inflation, rose by 6.7%, marking the largest increase since July 2008 (7.1%). The core inflation rate was also recorded at 4.1%, the highest since April 2009 (4.2%). Core inflation excludes agricultural products and petroleum products, which are sensitive to seasonal factors or temporary shocks, thus showing the underlying trend of inflation.

Impact of Supply Chain Instability... High Inflation Expected to Continue for a While

The reason inflation has surpassed 5% is due to the severe supply chain instability triggered by the Ukraine crisis. The prolonged high oil prices and agflation caused by global supply chain disruptions are now having a full-fledged impact on domestic prices with a time lag. In fact, petroleum and grain prices were cited as the biggest factors driving inflation last month. The price increase rate for industrial products such as petroleum and processed foods was 8.3%, the highest since October 2008 (9.1%). The contribution of industrial product price increases to inflation was as high as 2.86 percentage points.

The problem is that the high inflation situation is likely to continue for some time. The government expects the inflation rate to peak next month and in July. Lee Seung-heon, Deputy Governor of the Bank of Korea, said at an inflation monitoring meeting yesterday, "International oil prices and food prices remain at high levels, and demand-side pressures have increased recently due to the lifting of social distancing measures, so a high consumer inflation rate in the 5% range is expected to continue in June and July."

There are also forecasts that the inflation rate could reach the 6% range in the short term. Considering domestic and international conditions such as international oil prices, it is unlikely that inflationary pressures will ease in the second half of this year. The last time the consumer price inflation rate reached the 6% range was in November 1998 (6.8%) during the foreign exchange crisis.

Production, Consumption, and Investment All Triple Decline
(Busan=Yonhap News) Reporter Son Hyung-joo = A view of Busan Port Sinsundae Pier on the afternoon of the 31st of last month. In April, production, consumption, and investment recorded a 'triple decline' for the first time in 2 years and 2 months since the outbreak of the COVID-19 pandemic. Amid growing concerns over global inflation, rising raw material prices and ongoing supply chain disruptions are further increasing worries about economic slowdown. May 31, 2022
handbrother@yna.co.kr
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Trade Deficit of $7.85 Billion from January to May... First Time in 25 Years Since the Foreign Exchange Crisis

The trade balance is also worsening. According to the Ministry of Trade, Industry and Energy, the trade balance recorded a deficit of $1.71 billion last month. Exports increased by 21.3% year-on-year to $61.52 billion, while imports rose by 32% to $63.22 billion. As a result, the trade balance posted a deficit for two consecutive months following April (-$2.51 billion). The trade balance had turned positive in February this year but returned to a deficit in April.

The cumulative trade deficit this year reached $7.85 billion. A trade deficit of this scale from January to May has not been seen in 25 years since the $9.26 billion deficit recorded during the 1997 foreign exchange crisis. It is also $1.51 billion higher compared to 2008 ($6.34 billion), when the global economic crisis occurred. At this rate, the trade deficit could exceed $10 billion within one to two months.

Concerns about the prolonged trade deficit are growing. China's large-scale lockdown measures, which negatively affect exports, are continuing, and the spread of food protectionism is driving international grain prices to surge. In fact, agricultural product imports last month amounted to $2.42 billion, marking three consecutive months above the $2 billion level since March.

If the current account also posts a deficit, the twin deficits will be unavoidable. The trade balance accounts for the largest portion of the current account. If the trade deficit becomes chronic, the current account, which has maintained a surplus since May 2020, could turn into a deficit. Given that the fiscal deficit is expected to exceed 70 trillion won this year due to COVID-19 response measures such as compensation payments, if the current account also records a deficit, twin deficits will occur for the first time in about 25 years since the foreign exchange crisis.

President Yoon Seok-yeol also expressed a sense of crisis. On his way to the Yongsan Presidential Office yesterday morning, President Yoon said, "Our yard is now in the eye of the storm, including the economic crisis," and added, "Can't you feel the windows shaking and the branches in the yard swaying right now?"

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