[2022 Economic Policy] Government Freezes Public Utility Fees in Q1... Inflation Expected to Rise by 2% Next Year

[Sejong=Asia Economy Reporter Son Seonhee] The government has decided to freeze public utility charges such as gas and electricity in the first quarter of next year. This measure aims to alleviate the burden on the winter household economy amid expectations that the recent inflation trend will continue into next year. However, concerns are rising that pressure to raise public utility charges may intensify after the second quarter.

According to the Ministry of Economy and Finance on the 20th, Lee Okwon, the first vice minister of the Ministry of Economy and Finance, said at a detailed briefing on the '2022 Economic Policy Direction' on the 17th, "It is necessary to freeze electricity and gas charges during the winter season in the first quarter from various perspectives," adding, "The consultation process among related ministries is almost at the final stage under this principle." There had been disagreements between the Ministry of Economy and Finance and the Ministry of Trade, Industry and Energy regarding whether to raise public utility charges, but it was decided to freeze the charges for the first quarter.

Vice Minister Lee explained the background of the freeze, saying, "Consumer prices rose 3.7% last November, and there are various upward pressures, so there are many risk factors," and "If public utility charges are also raised, there is a possibility that inflation anxiety will spread." He added, "Especially in winter, the burden of electricity and city gas charges is actually very significant from the perspective of prices for ordinary people."

However, despite the surge in fuel prices due to rising international oil prices, freezing electricity and gas charges has increased losses for related public enterprises such as Korea Electric Power Corporation (KEPCO). Ultimately, since this burden is passed on to future generations, voices are growing that sequential public utility charge increases based on fuel costs should be implemented. In fact, KEPCO's cumulative operating loss until the third quarter reached 1.1298 trillion won, with operating expenses alone amounting to 5.4618 trillion won due to increased power purchase costs from rising fuel prices.

Vice Minister Lee also hinted at the possibility of future increases, stating, "Public utility charges are not simply suppressed (from rising) but will eventually be 'spread out over time.'"

Meanwhile, the government forecasted that the annual inflation rate will record 2.4% this year and show a 2.2% increase next year. Although this is a slight stabilization compared to this year, it is explained that the level will still remain higher than the government's inflation management target of 2.0%.

Supply-side factors such as international oil prices, which led inflation this year, are expected to ease somewhat. The Ministry of Economy and Finance stated, "International oil prices are expected to decline gradually in the second half of the year due to increased supply from oil-producing countries." However, as COVID-19 vaccine coverage expands and domestic demand recovery accelerates next year, especially with a rapid rebound in face-to-face services, demand-driven inflationary pressures centered on personal services are expected to increase.

The government's fuel tax reduction policy, implemented from last month until April next year, is helping to ease inflation, but if international oil prices stabilize, the reduction rate will be gradually scaled back after April next year. Additionally, the special tax reduction rate for small and medium enterprises operating 'Altteul Gas Stations' will be temporarily increased until 2023. For small enterprises, the rate will rise from the existing 10% to 20%, and for medium enterprises, it will increase from '0% in the metropolitan area and 5% in non-metropolitan areas' to '10% in the metropolitan area and 15% in non-metropolitan areas,' respectively.

The agricultural, livestock, and fishery product discount coupons implemented this year will continue to be supported next year. Also, for eggs, whose prices surged this year, two additional auction markets will be added in 2022 and one more in 2023.

To stabilize living costs next year, the government plans to regularly operate a ministerial-level inspection system using the Emergency Economic Central Disaster and Safety Countermeasure Headquarters and introduce a 'departmental responsibility system' for inflation by sector. Prices of agricultural, livestock, and processed foods, as well as dining out, will be primarily managed by the Ministry of Agriculture, Food and Rural Affairs, while prices of petroleum and other industrial products will be overseen by the Ministry of Trade, Industry and Energy. Meanwhile, the Ministry of the Interior and Safety and local governments will operate 'Price Situation Rooms' to intensively crack down on market-disturbing activities such as unfair charges, measurement violations, failure to display prices or origin, and hoarding.