Bloomberg News

South Korea’s Inflation Moderates From Three-Year High

October 03, 2011

(Updates with economist quote in fourth paragraph.)

Oct. 4 (Bloomberg) -- South Korea’s inflation slowed in September from the fastest increase in 3 years as food prices moderated, while still remaining above the central bank’s target range.

Consumer prices rose 4.3 percent from a year earlier, after a 5.3 percent advance in August, Statistics Korea said today in Gwacheon, south of Seoul. That was lower than the median estimate of 4.5 percent in a Bloomberg News survey of eight economists. Prices rose 0.1 percent from August.

Bank of Korea Governor Kim Choong Soo has vowed to resume “normalizing” borrowing costs once the global economic outlook improves and Europe’s debt crisis calms down. His policy board left the benchmark interest rate unchanged for a third straight month in September even as inflation exceeded the bank’s target ceiling of 4 percent every month this year.

“The BOK will keep monetary policy on hold, at least until the end of this year, while closely monitoring global financial markets and the economic outlook,” said Oh Suk Tae, an economist at SC First Bank Korea Ltd. in Seoul. “Headline inflation peaked in August and will eventually return to the BOK’s target range,” of 2 percent to 4 percent, he said.

South Korea’s consumers predict that price increases will accelerate, with the expected inflation rate over the next 12 months at 4.3 percent in September, faster than 4.2 percent in the previous month and the most since November 2008, a survey by the Bank of Korea showed last week.

Core Prices

Core prices, which exclude energy and food costs, rose 3.9 percent in September from a year earlier, compared with 4 percent in the previous month, today’s report showed. Prices of agricultural, livestock and fishery products gained 2.3 percent from a year earlier, the report showed.

The Korean currency lost 9.5 percent to 1,178.10 per dollar last month, the biggest decline since February 2009, according to data compiled by Bloomberg. The weaker currency may put pressure on inflation as it boosts import costs.

“We expect headline inflation to exceed 4 percent at least until November, and the recent surge in dollar-won exchange rates adds to near-term inflation risks,” SC First’s Oh said.

Higher living costs have increased voters’ discontent with President Lee Myung Bak, whose public support dropped to 30.3 percent last month compared with 76 percent when he came to power in February 2008, according to a Sept. 19-23 poll by Seoul-based Realmeter. Lee said last month “there’s no perfect solution” to accelerating inflation.

Power Prices

Korea Electric Power Corp. needs to adjust electricity prices to “realistic” levels, Chief Executive Officer Kim Joong Kyum said on Sept. 28. The state-run utility raised power prices by an average 4.9 percent from Aug. 1, the first increase in more than a year.

Helping ease inflation last month, prices of fresh food items such as fish, fruits and vegetables fell 7.4 percent from a year earlier and 2.7 percent from August.

Exports, which are driving growth in Asia’s fourth-largest economy, expanded 19.6 percent last month from a year earlier, the slowest in three months. Factory output slid 1.9 percent in August from July, when it fell 0.3 percent.

Manufacturers’ confidence for October held at a 21-month low, while consumer confidence stayed at its lowest since March as businesses and people braced for a global slowdown.

--With assistance from Sarina Yoo in Seoul. Editors: Ken McCallum, Cherian Thomas

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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