Seoul: Higher living costs and the prospect of rate hikes are threatening to deepen the burden on vulnerable populations as domestic consumer prices continue to rise amid the fallout from the ongoing Middle East war, now entering its fourth month. The consumer price index witnessed a notable increase of 3.1 percent in May compared to the previous year, marking the highest rise in 26 months, as reported by the Ministry of Data and Statistics on Tuesday.
According to Yonhap News Agency, the overall upward trend of consumer inflation is largely attributed to a significant 24 percent surge in petroleum prices. The feared effects of a prolonged conflict have begun impacting the real economy, and without stabilization of international oil prices, controlling inflation remains a challenge. Consumer inflation escalated from 2.2 percent in March to 2.6 percent in April, and then surged another 0.5 percentage point in May, entering the 3 percent range.
The government has estimated that the oil price ceiling helped reduce inflation by 0.6 percentage point. Without this policy, consumer inflation could have soared to 3.7 percent last month. However, the policy may hinder natural conservation efforts typically observed when oil prices are high. Strong travel demand during last month's holiday period further drove up travel-related costs, with overseas package tour prices increasing by 26.3 percent and car rental fees by 25.7 percent.
Reassessing the approach of providing uniform price benefits to all citizens, regardless of income levels, is necessary to determine if it is a rational and effective response to high oil prices. Rising prices correlate with increased living expenses, disproportionately affecting low-income households that allocate most of their income to essential needs.
The cost-of-living index, which tracks the prices of commonly purchased necessities, also saw an increase from 2.9 percent in April to 3.3 percent in May, hitting a 25-month high. The Bank of Korea (BOK) is closely monitoring the rapid rise in prices, especially living costs, and has suggested the possibility of raising the benchmark interest rate at an appropriate time, with markets anticipating a rate hike in the latter half of the year.
Government and BOK officials seem to expect that consumer inflation will persist in the 3 percent range for a while. In light of the recent rise in consumer inflation and its outlook, the BOK's perspective that a benchmark rate hike will be necessary appears convincing.
For economically vulnerable groups, rising inflation combined with increased interest rates amplifies the burden on borrowers. Carefully designed measures are needed to aid small business owners and micro-entrepreneurs struggling with loan interest payments.
To stabilize prices, the government is considering early release of stockpiled supplies, discounts on farm and livestock products, and extending fuel tax cuts. Rigorous monitoring and punishment of hoarding and price-fixing activities are also essential.
President Lee Jae Myung has indicated a willingness to expand fiscal spending, amid expectations of "excess tax revenue," particularly from semiconductor companies. However, expanding fiscal spending carries the risk of undermining efforts to contain inflation by increasing the money supply in circulation.
The Lee administration has implemented one-off cash handouts or local currency distributions to a significant portion of citizens under the pretext of livelihood support. However, these policies, which have minimal impact on economic stimulus or living support but increase market liquidity, should be avoided as populist measures.
What is needed now is close coordination between the government and the Bank of Korea to mitigate the impact of high inflation and high interest rates.