[3P Threatening the Korean Economy] The Unfinished 'Price Counterattack'

②Price (Inflation): Expected at 2.6% but Hidden Risks Exist
Suppressed Inflation May Explode After the General Election

Last year can be summarized as a year of ‘high inflation.’ Real wages declined, and retail sales turned downward for the first time in 20 years. The world suffered from high inflation. Although there are expectations that inflation will be controlled this year and that we will enter an era of ‘moderate inflation’ in the 2% range, it remains uncertain whether these ‘rosy forecasts’ will materialize, given the numerous factors threatening prices everywhere.

Major economic and financial institutions expect domestic consumer prices to remain in the 2% range this year. The Bank of Korea and the Korea Development Institute (KDI) forecast 2.6%, and the average projection from 20 institutions including government research bodies, private research institutes, international organizations, and securities firms is also 2.6%. The government had projected a lower 2.3% last July but is expected to revise this upward somewhat early this year.

The view is that the trend of slowing consumer price increases seen last year will continue this year. Compared to early last year, a clear downward trend in consumer prices is detected toward the end of the year. In Korea, the rate dropped significantly from 3.4% in May to 3.3% in November; in the U.S., from 4.0% to 3.1% during the same period; and in the Eurozone, from 6.1% to 2.4%. Based on this, many expect that inflation will remain in the 3% range in the first half of this year before falling to the 2% range in the second half, showing a ‘high first half, low second half’ pattern.

However, it is uncertain whether the high inflation wave that the Choi Sang-mok administration must overcome will simply follow this ‘high first half, low second half’ trajectory. These projections assume that ‘agricultural product prices will gradually stabilize and international oil prices will not rise sharply again.’ However, international oil prices, which had been declining throughout last year, surged recently as the Israel-Hamas conflict expanded near the Red Sea. The Houthi rebels, supported by Iran, have attacked vessels passing through the Red Sea in support of Hamas, and the U.S. has responded, escalating tensions again from the start of the new year.

Regarding the rise in fruit prices such as ‘gold apples’ and ‘gold strawberries,’ which were among the main causes of last year’s inflation, the government plans to respond with import fruit tariff quotas, but the possibility of fresh food price increases due to abnormal weather remains.

The government’s efforts to suppress inflation ahead of the April general election this year could also pose a risk going forward. The government has been suppressing prices in both public and private sectors. It formed a task force (TF) to manage major food prices by item, leading companies to cancel their price increase plans one after another. A representative example is the price reduction of soju. As a result, there are observations that major distribution companies are timing their price increases for after the general election.

Electricity and gas rates, as well as fuel taxes, also pose risks. Korea Electric Power Corporation (KEPCO) has accumulated deficits reaching 45 trillion won, making electricity rate hikes inevitable, yet it is freezing electricity rates ahead of the general election. When concerns about new KEPCO bond issuance arose, the urgent issue was temporarily resolved through dividends from subsidiaries, but there are expectations that electricity rates will increase after the election.

The same applies to city gas. The government has repeatedly extended fuel tax reductions for two years to minimize the impact of oil prices on inflation, but if this measure is scaled back this year, it could affect prices. On the 20th of last month, the Bank of Korea analyzed in its ‘Price Stability Target Operation Review’ that “gradual increases in electricity and city gas rates and reductions in fuel tax cuts may act as factors slowing the inflation deceleration trend somewhat next year.”

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