According to the Bank of Korea and domestic securities companies on the 1st, the annual inflation rate this year (compared to the previous year) is expected to be close to the BOK’s target of 2%. At the time of its economic outlook in May, the BOK had predicted an annual consumer price inflation rate of 1.8%, but analysis is gaining strength that the consumer price inflation rate will exceed the initial estimate. The average of the six securities firms surveyed by E-Daily is 2% higher. On the other hand, the Ministry of Strategy and Finance expects that the annual inflation rate will not exceed 1.8%.
International oil price soaring, domestic demand recovery accelerates… “Optimal conditions for inflation”
The consumer price inflation rate reached 2.6% in May, the highest in nine years and one month, and June is also expected to exceed the mid-2% level, raising concerns about inflation. The annual consumer price inflation rate in Korea has never exceeded 2% in about 8 years since it recorded 2.2% in 2012. In 2019, it fell to 0.4% and last year, when Corona 19 hit, it fell to the level of 0.5%.
The biggest reason for claiming that inflation will come rather than a temporary rise in prices is international oil prices. The international oil price continues to rise above the $70 level. On the 29th (local time) on the New York Mercantile Exchange, the price of West Texas Intermediate (WTI) for August contract closed at $72.98 per barrel, up 7 cents (0.1%) from the previous trading day. The price of Dubai oil, which is linked to liquefied natural gas (LNG), which has high domestic consumption, is also trading at around $72.
There are even predictions that the international oil price could rise to $100 in the market. Vitol, Glencore, Trapigura, and Goldman Sachs predicted that the international oil price would rise to $100 due to the supply-demand imbalance.
Se-wan Kim, a professor of economics at Ewha Womans University, said, “The environment is already in place for inflation to occur as international oil prices have entered a long-term cycle that continues for 10 years.”
Another factor that raises inflationary pressure is the rapid recovery of domestic consumption. The BOK also announced on the 24th of last month that the recent increase in consumer price inflation has contributed not only to supply factors such as agricultural and livestock products and oil prices, but also to personal service prices. The contribution of each item to the consumer price increase rate (year-on-year) during April-May was followed by agricultural and fishery products (+1.0 percentage points), services (+0.8 percentage points), and petroleum (+0.7 percentage points).
Park Seong-woo, a researcher at DB Investment & Securities, said, “In addition to the rise in oil prices, domestic vaccine distribution is also accelerating. Considering that service prices will rise in the second half of the year, the annual consumer price inflation rate will reach 2%.” expected,” he said.
Ahn Ki-tae, a researcher at NH Investment & Securities, said, “The recent inflation rate is higher than the average of the past 10 years even on a monthly basis, excluding the base effect.” “I think the annual inflation rate is 2.2%, which is more than 2%.”
Ministry of Strategy and Finance, KDI “Agricultural products prices, the base effect of international oil prices disappears in the second half of the year”
Conversely, the Ministry of Strategy and Finance and the Korea Development Institute (KDI), a national research institute, expect the annual inflation rate to be less than 2%. The Ministry of Strategy and Finance said that the supply of agricultural and livestock products will recover gradually in the second half of the year and the base effect of last year’s international oil price will gradually diminish, so that the annual level will be limited to 1.8%. KDI also predicted that domestic consumption would not cause inflation and that oil prices and agricultural, livestock and fishery product prices would show stability.
The main reason behind the judgment that there will be no key inflation is that the base effect of COVID-19 will disappear from the second half of the year. Core prices (excluding food and energy prices), which better reflect key price trends, are estimated to have risen by 1.2% in May.
KDI Director Gyu-cheol Gyu-cheol said, “Recent inflation has been driven by supply levels such as livestock and fishery products and international oil prices, which will show a more stable trend towards the end of the year.” “The core prices, excluding food and petroleum products, are still below the BOK’s target of 2% “He said.
Lim Hye-yoon, a researcher at KTB Investment & Securities, also said, “As international oil prices hit the lowest point in April-May of last year, the base effect will disappear from June and the rise in consumer prices will be dampened.
Some argue that domestic consumption and employment recovery are insufficient to induce demand-level inflation. KDI analyzed that the manufacturing industry recovered the reference point of 100 when looking at production trends by industry as of the fourth quarter of last year, but the service industry was still not completely free from the impact of COVID-19.
Cho Yong-gu, a researcher at Shinyoung Securities, said, “Private consumption is currently recovering, but service price increases due to the resumption of economic activity will slow down in the second half of the year.”
Employment recovery, which is the basis for sustaining domestic consumption, is still insufficient. According to the ’employment trends in May’ released by the National Statistical Office, the number of employed people increased by 619,000 in May following the April (652,000) in the same month of the previous year, but there was a gap by age. The number of employed people in their 30s and 40s decreased by 69,000 and 6,000, respectively. “Exports are recovering, but the recovery of domestic demand is weak, and there are many short-term jobs in the recovery of employment, so recovery is still slow mainly in the lower classes,” said Gyu-cheol Gyu.