Korean Inflation Quickens, Weighing on Voters Ahead of Election

(Bloomberg) -- South Korea's inflation unexpectedly accelerated in February as rising costs weigh on voters ahead of next week's presidential election, while Russia's invasion of Ukraine suggests little respite is in the offing.

Consumer prices advanced 3.7% from a year earlier, edging up from a 3.6% pace the prior month and exceeding economists' expectation of 3.5%, statistics office data showed Friday. Consumer prices, excluding costs for oil and agricultural goods, climbed 3.2%, the highest reading since 2011.

Inflation has jumped to the forefront of concerns among South Koreans and is likely to worsen as the crisis in Ukraine threatens to disrupt supply chains. The Bank of Korea's three interest-rate increases have so far failed to make a dent in price gains and economists expect it will hike again in coming months.

“If oil prices rise, import prices rise, that means producer prices and consumer prices rise, too, within a couple of months,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities. “The Bank of Korea will have to react whether in April or May.”

BOK Governor Lee Ju-yeol warned last week of a further hit to costs from Russia's invasion of Ukraine. The central bank sharply revised up its inflation forecast for this year to 3.1%, well in advance of its 2% target, with consumer prices having held above 3% since October.

Koreans typically put economic issues at the top of factors that influence their voting decisions. In a November poll of 1,200 Seoul residents, inflation was already cited as the biggest problem facing the economy in 2022, contrasting with the same survey a year earlier that nominated employment as No. 1.

Respondents were also pessimistic when it came to the prospects for reining in rising prices.

“The share of people who said this would not easily improve has spiked, seeing that it was related to issues such as energy and other supply troubles that can't be controlled from within,” said Oh Eun-joo, a senior researcher at the Seoul Institute that conducted the survey. “Costs are rising across the board.”

Korea isn't the only country where inflation has surged and developed into a major headwind to recovery from the pandemic. President Joe Biden said this week in his State of the Union address that his top priority is controlling inflation, while euro-zone inflation quickened to an all-time high in February.

“The Ukrainian crisis will have to be watched closely and hard,” said Yoon Yeo-sam, an analyst at Meritz Securities. “Central banks are getting wary.”

While South Korea has little control over energy prices as it relies heavily on fuel imports, inflation readings that exclude oil and food are also elevated.

The government has ratcheted up its price monitoring as inflation increasingly threatens the momentum of the economy's recovery from the pandemic.

Finance Minister Hong Nam-ki said earlier this week that he was preparing a wide range of measures to ease cost pressures and pointed out that sanctions against Russia would add to economic uncertainties. In a more positive sign, exports rose more than expected in February, with the trade balance returning to a surplus.

Korea's biggest virus outbreak of the pandemic has had a surprisingly limited impact on consumer sentiment, partly owing to the view that omicron is not as dangerous as earlier variants of the coronavirus.

Stimulus fiscal spending, including a 16.9 trillion won ($14 billion) extra budget passed last month to help small businesses, is also shoring up consumption, while the government has eased its curfew on restaurants, bars and other service vendors.

Bipartisan View

Both ruling and opposition parties agree that another round of supplementary spending may be needed after the election is over.

With the economic recovery in place, most economists see the BOK raising its benchmark rate to 1.5% when the board meets in mid-April under a new governor. It stood pat at 1.25% last week.

The BOK also maintained its growth forecast for gross domestic output at 3%, while acknowledging the Ukraine-Russia conflict weighed heavily on the minds of board members.

Friday's inflation report also showed:

Overall consumer prices rose 0.6% compared with January
Transportation costs led the gains, jumping 8.3% from a year earlier
Utility costs advanced 3.6%. Food and beverage prices increased 3.6% from a year earlier. The price of entertainment products rose 1.5%