Prices Hit Highest Level in 24 Years... Next Year Expected to Show 'High at the Start, Low at the End' Trend

This Year's Inflation Rate at 5.1%... Highest Since 1997 Foreign Exchange Crisis

[Asia Economy Sejong=Reporters Lee Junhyung and Mun Jewon] "Nothing hasn't gone up."

Inflation was one of the biggest economic issues this year. Literally, there was no price that did not rise. The monetary authorities kept raising interest rates to reduce inflationary pressures, and the government was busy implementing livelihood measures to stabilize prices, such as cutting fuel taxes. The public felt the soaring prices every month when shopping or dining out. Since the perceived inflation by the public is generally higher than the official inflation statistics, the impact of rising prices on household finances is believed to have been even greater.

The consumer price inflation rate for this year, announced by Statistics Korea on the 30th, was 5.1%, the highest since the 7.5% recorded during the 1998 foreign exchange crisis. This means prices rose the most in 24 years. The monthly consumer price inflation rate has remained in the 5% range for eight consecutive months since May, when it recorded 5.4%. The inflation rate for daily necessities, which are frequently purchased and closer to perceived inflation, even surged to the 7% range in June and July.

In particular, the price increases were large for items closely related to food and living expenses. Fresh and processed foods rose by 5.4% and 7.8% respectively compared to last year. Agricultural, livestock, and marine products all increased by 3.8%, with agricultural products up 2.4%, livestock products 6%, and marine products 3.4%. Specifically, items such as pork (8.1%), imported beef (18.3%), chicken (13.8%), napa cabbage (35.7%), tangerines (16.8%), grapes (17.2%), and strawberries (14.3%) saw significant price hikes.

Impact of Supply Chain Instability

The biggest factor driving inflation this year is analyzed to be the sharp rise in energy and raw material prices. Russia's invasion of Ukraine in February shook the global supply chain, causing energy and raw material prices such as crude oil and gas to soar. This is one reason why petroleum product prices such as gasoline (13.6%), diesel (31.9%), and automotive liquefied petroleum gas (LPG, 15.9%) rose by 22.2% compared to last year. Consequently, the inflation rate for industrial products, including petroleum products, recorded 6.9%.

The surge in electricity and gas rates due to rising energy costs further fueled soaring prices. Electricity, gas, and water prices increased by 12.6% this year, with electricity rates up 12.9% and city gas up 15.8%. This is the highest since separate statistics for electricity, gas, and water have been compiled since 2010.

‘High in the First Half, Low in the Second Half’ Forecast for Next Year

Of course, such high inflation is not unique to South Korea. Major countries including the United States suffered a direct blow from supply chain instability caused by the Ukraine crisis. According to the Ministry of Economy and Finance, last month the consumer price inflation rates in the US and UK were 8.2% and 8.9%, respectively, both in the high 8% range. The Eurozone (19 countries using the euro) inflation rate was also similar at 8.3%. A ministry official explained, "This year, global inflation surged significantly due to international energy and raw material price instability and supply chain disruptions," adding, "(South Korea) showed a relatively lower level compared to major countries due to policy efforts to minimize the domestic impact of external shocks."

The concern is next year's inflation. The government expects inflation to show a ‘high in the first half, low in the second half’ trend, with the inflation rate decreasing as the year progresses. The inflation rate is forecasted to be in the 4% range in the first half and in the 3% range in the second half, ultimately settling in the mid-3% range. Eo Unseon, Director of Economic Trend Statistics at Statistics Korea, said, "Assuming the current trend continues, demand-side inflationary pressures are unlikely to increase next year," adding, "Since inflation was high this year, a base effect may work in our favor next year."

However, there are still many variables. Electricity and gas rates, which are directly linked to the livelihood economy, are representative examples. The government has repeatedly expressed its intention to significantly raise electricity and gas rates from next year to improve the financial structure of Korea Electric Power Corporation and Korea Gas Corporation.

Lee Chang-yong, Governor, Speaking at the 2022 Second Half Inflation Briefing
(Seoul=Yonhap News) Lee Chang-yong, Governor of the Bank of Korea, is explaining the status of inflation stabilization targets at the 2022 second half inflation briefing held at the Bank of Korea press room in Jung-gu, Seoul on the morning of the 20th. 2022.12.20 [Joint Coverage]
photo@yna.co.kr
(End)

＜Copyright(c) Yonhap News Agency, Unauthorized reproduction and redistribution prohibited＞

Focus on Monetary Policy Stance

Accordingly, the Bank of Korea is likely to maintain a tight monetary policy stance for the time being, considering the high inflation rate. At the Monetary Policy Committee meeting held on the 24th of last month, the Bank of Korea raised the base interest rate by 0.25 percentage points. Many in the market expect the Bank of Korea to raise the base rate by another 0.25 percentage points at the January Monetary Policy Committee meeting next year to reach 3.5% annually and maintain this level until inflation is clearly controlled.

However, if inflation in the first half of next year appears more unstable than expected, the final interest rate level may rise. Even this month, electricity, gas, and water prices rose by 23.2%, and processed food prices recorded a 10.3% increase, the highest since April 2009. Dining-out prices still exceed 8%. There is also a possibility that agricultural and marine product price increases will expand due to the holiday effect.

The speed of the economic recession next year and China’s ‘With Corona’ policy are also variables. If the economy slows rapidly next year due to this year’s sharp interest rate hikes, the monetary tightening stance may ease, but if China’s transition to a ‘With Corona’ policy revives the economy, it could again stimulate inflation. Lee Hwansuk, Deputy Governor of the Bank of Korea, said at the ‘Inflation Situation Review Meeting’ held this morning at the Bank of Korea headquarters in Seoul, "There is great uncertainty regarding oil price trends, easing of quarantine measures in China, and the resurgence of COVID-19," adding, "Consumer prices are expected to continue rising around 5% in early next year."

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