Inflation Reignites Amid Middle East War Fallout

Inflation reignites

Higher living costs, prospect of rate hikes threaten to deepen burden on the vulnerable

Domestic consumer prices continue to rise amid the fallout from the Middle East war, now in its fourth month.

The consumer price index rose 3.1 percent in May from a year earlier, according to the Ministry of Data and Statistics on Tuesday. It was the highest increase in 26 months.

The overall upward trend of consumer inflation was largely driven by a steep 24 percent jump in petroleum prices. The feared effects of a prolonged war have begun to show up in the real economy. Unless international oil prices stabilize, it will be difficult to bring inflation under control.

Consumer inflation accelerated from 2.2 percent in March to 2.6 percent in April and then jumped another 0.5 percentage point a month later, entering the 3 percent range.

The government estimated that the oil price ceiling lowered inflation by 0.6 percentage point. While that may be intended to underscore the effectiveness of the policy, consumer inflation would have surged to 3.7 percent last month without it.

It is cause for concern that this policy stands in the way of the conservation efforts that people naturally make when oil prices are high. Strong travel demand during the holiday period last month drove up travel-related prices, with overseas package tour costs rising 26.3 percent and car rental fees 25.7 percent, respectively.

It is necessary to reconsider whether maintaining uniform price benefits to all citizens over a prolonged period, regardless of income level, is a rational and effective response to high oil prices.

When prices rise, the strain of living expenses increases accordingly, making life feel much tougher. In particular, low-income households, which spend most of their income on essential living expenses, are hit hard.

The increase in the cost-of-living index, which tracks the prices of commonly purchased necessities, also climbed from 2.9 percent in April to 3.3 percent last month, a 25-month high.

The Bank of Korea, which is closely monitoring the rapid rise in prices, particularly living costs, has indicated that it may need to raise the benchmark interest rate at an appropriate time. Markets expect a rate hike in the second half of the year.

Government and BOK officials reportedly appear to be expecting that consumer inflation will not fall quickly and will remain in the 3 percent range for some time. Given the recent rise in consumer inflation and its outlook, the BOK's view that the benchmark rate hike will be necessary appears persuasive.

When inflation is rising and interest rates are raised, the burden on borrowers in economically vulnerable groups becomes doubly heavy. More carefully designed measures are needed to support small business owners and micro-entrepreneurs struggling with loan interest payments.

To stabilize prices, the government is reviewing the early release of stockpiled supplies, discounts on farm and livestock products, and an extension of fuel tax cuts. Hoarding and price-fixing activities must also be rigorously monitored and punished.

President Lee Jae Myung has signaled an intention to boldly expand fiscal spending, amid expectations of "excess tax revenue," particularly from semiconductor companies. However, expanding fiscal spending risks undermining efforts to contain inflation, as it increases the money supply in circulation.

The Lee administration has repeatedly rolled out one-off cash handouts or local currency of several hundred thousand won to a large majority of citizens in the name of livelihood support. However, policies of this kind, while having little effect on economic stimulus or living support but simply increasing market liquidity, should be eschewed as populist measures.