Inflation Rate Forecasted at 1.9% in Second Half... Growing Concerns Over Inflation

Grain Price Increases and Other Risk Factors Persist
Government Activates Price Countermeasures Team for Chuseok

[Sejong=Asia Economy Reporter Kim Hyunjung] With the economic recovery coinciding with a heatwave, the prices of food products such as agricultural and livestock products are showing a marked upward trend. Concerns are emerging that this could lead to a trend of rising inflation in the future.

According to the National Assembly Budget Office’s ‘Economic and Industrial Trends Issue’ on the 29th, the inflation rate for the second half of this year is expected to be 1.9%, up 0.1 percentage points from the first half. Although this is somewhat lower than the 2.4% inflation rate recorded in the second quarter due to the base effect and sharp rise in oil prices, it will be the largest half-year increase since the first half of 2017. The core inflation index, which excludes food and energy prices and had slowed since 2015, rose 1.1% in the first half of this year and is expected to increase slightly to 1.2% in the second half.

The Budget Office stated, "Consumer price inflation driven by the sharp rise in raw material prices has continued this year, and the inflation rate is expected to remain close to the target of 2% in the second half," adding, "The upward trend in raw material prices may also sustain the rise in energy prices." It further expressed concern, saying, "Although food prices, which have shown a sharp increase since the second half of last year, are expected to slow down, risk factors such as worsening weather conditions, increased demand due to COVID-19 vaccinations, and rising international grain prices persist."

Recently, prices of vegetables and fruits have been rising. Although demand increases during the holiday season, supply is decreasing due to the hot weather. According to the Korea Agro-Fisheries & Food Trade Corporation (aT), as of the 28th, the price of spinach (1kg) was 12,841 won, a 35% increase compared to 9,519 won a year ago. The price of watermelon (premium, 1 piece), a summer seasonal fruit, reached 22,908 won, up 24% from 18,429 won a year earlier. Apples (premium, 10 pieces) were priced at 32,867 won, up 21% from 27,041 won the previous year, and pears (premium, 10 pieces) rose 48% to 52,254 won from 35,316 won the year before.

The government has responded by activating a related countermeasures team to prevent recent price increases from leading to a surge in prices due to Chuseok demand. Since early this month, the Ministry of Agriculture, Food and Rural Affairs has established an ‘Emergency Countermeasures Team for Major Agricultural Product Price Management’ led by the Director of the Food Industry Policy Office and is promoting supply-demand stabilization measures to prepare for production volatility. In particular, it plans to secure stockpiles, reserve seedlings, and contracted shipment volumes, as well as provide discounted nutritional supplements.

In the United States, voices are emerging that the spread of COVID-19 has caused supply chain bottlenecks, which could lead to higher and more prolonged inflation in the future. Jerome Powell, Chair of the U.S. Federal Reserve (Fed), said at a press conference following the Federal Open Market Committee (FOMC) regular meeting on the 28th (local time), "The likelihood of inflation being higher and more persistent than our projections has increased." The Wall Street Journal (WSJ) also reported, "Some members are concerned that supply chain bottlenecks related to the economic reopening will cause inflation to remain elevated longer than expected." According to a consumer expectations survey conducted in June, expected inflation in the U.S. over the next 12 months rose to 4.8%, up 0.8 percentage points from 4.0% in May. This is the highest level since the survey began in 2013.