South Korean inflation surged by the most in nearly 14 years, adding to economic uncertainty in Asia’s fourth-biggest economy caused by Russia’s invasion of Ukraine and supply chain disruptions due to lockdowns in China.
The consumer price index rose 5.4 per cent in May compared with the same period a year earlier, surpassing a 5.1 per cent forecast by economists surveyed by Reuters. The rise marked the fastest increase since August 2008, according to South Korea’s statistics office, after rising 4.8 per cent in April.
President Yoon Suk-yeol on Friday warned of a looming “economic crisis”, saying: “Our lawn currently lies in the path of the typhoon.”
He made the comments after industrial output, consumption and investment all declined in April for the first time in nearly two years.
The latest data were released as inflation has soared across much of the world’s advanced economies to multi-decade highs. Prices have also risen in many parts of Asia after initially lagging behind Europe and North America.
Inflationary pressures are strengthening the case for the Bank of Korea to raise interest rates next month as it struggles to deal with the fallout of pandemic-era stimulus policies and higher commodity prices. The central bank last week raised interest rates by a quarter point to 1.75 per cent in its fifth increase since last summer.
The BoK said inflation would probably remain above 5 per cent in June and July and governor Rhee Chang-yong has said the bank would prioritise fighting inflation rather than boosting economic growth.
It is “more important than anything to stably manage inflation expectations”, the central bank said.
The BoK blamed the price increases on higher international oil and food prices and expected inflationary pressure to grow owing to higher demand-side pressure as Covid-19 restrictions are eased further.
The bank downgraded the country’s growth forecast for this year to 2.7 per cent, from the 3 per cent prediction it made in February.
The government on Monday approved a record supplementary budget of Won62tn ($49.9bn) to shore up small businesses hit by the pandemic. It also announced price-stabilising measures worth Won3.1tn, including cutting taxes and removing import duties on some food products by the end of this year.
The finance ministry said the inflation situation was “grave” and pledged to take further action. But economists expect price pressure to continue to weigh on the economy.
Krystal Tan, an economist at ANZ Research, said South Korea’s key policy rate would reach 2.5 per cent by the first quarter of next year.
“Considering various forces such as a robust labour market, high commodity prices and expansionary fiscal policies, we believe inflation will remain elevated for longer and overwhelm the impact of the recent reduction in import tariffs,” she said in a report on Friday.
