[Weekly Review] Consumer Prices Surpass 6%... Increasing Nuclear Power Share to Over 30%

Foreign Exchange Reserves See Largest Decline Since Financial Crisis... Shift from 'Expansionary Fiscal Policy to Sound Fiscal Policy'

On the 4th, one day before the government's announcement of June consumer price trends, citizens are shopping at Namdaemun Market in Seoul. Photo by Moon Honam munonam@

[Asia Economy Sejong=Reporter Kwon Haeyoung] South Korea's domestic consumer price inflation rate has surged into the 6% range for the first time in about 24 years since the 1998 financial crisis. The living cost index, composed of items closely related to the daily lives of ordinary people, surpassed a 7% increase. Foreign exchange reserves decreased by $9.43 billion in one month, marking the largest decline in 13 years and 7 months since the 2008 financial crisis. The government has confirmed the resumption of construction for Shin Hanul Units 3 and 4 and plans to expand the share of nuclear power generation to over 30% by 2030. The future fiscal management direction will shift completely from the previous administration's 'expansionary fiscal policy' to a 'sound fiscal policy' stance.

◆June Inflation Rate at 6%... Tariffs on Beef, Infant Formula, etc. Reduced to 0%＝According to the June consumer price trend announced by Statistics Korea on the 5th, the consumer price index last month was 108.22 (2020=100), up 6.0% compared to the same period last year. This is the first time in 23 years and 7 months since November 1998 (6.8%) that the consumer price inflation rate has exceeded 6%. Looking at product prices, industrial products including petroleum products (39.6%) and processed foods (7.9%) rose by 9.3%. Electricity, gas, and water prices increased by 9.6%. Agricultural, livestock, and fishery products rose by 4.8%, led by livestock products (10.3%). Service prices increased by 3.9%, with personal services up 5.8%, public services up 0.7%, and rent up 1.9%. Among personal services, dining out rose by 8%. Notably, the living cost index, composed of items closely related to the daily lives of ordinary people such as rice, ramen, and bread, exceeded a 7% increase. From the third quarter, public utility fees such as electricity and gas are expected to rise, and agricultural product prices are fluctuating due to early heatwaves, leading to forecasts of inflation rates in the 7-8% range.

Accordingly, the government has decided to reduce tariffs to 0% on seven essential items including beef, chicken, and infant formula starting this month. The plan is to lower tariffs on items that have a significant impact on the public to ease the burden of rapidly rising food prices. Importing beef from the U.S. and Australia duty-free is expected to reduce retail prices by 5-8%. The import price of chicken, currently subject to tariffs of 20-30%, is also expected to decrease significantly. Additionally, support for vulnerable groups will be strengthened by increasing the subsidy rates for energy vouchers, diapers, infant formula, and sanitary products.

◆Expanding Nuclear Power Generation Share to Over 30% by 2030＝The government, at the Cabinet meeting on the 5th, reviewed and approved the 'New Government Energy Policy Direction,' which includes confirming the resumption of construction for Shin Hanul Units 3 and 4 and expanding the share of nuclear power generation to over 30% by 2030. The expansion of renewable energy such as solar power will be moderated.

The core of this policy is maximizing the utilization of nuclear power. The government plans to strengthen energy security by increasing the share of nuclear power, which accounted for 27.4% of total power generation in 2021, to over 30% by 2030. It will also actively promote the prompt construction of Shin Hanul Units 3 and 4 and the export of 10 nuclear reactors by 2030 to revitalize the nuclear industry ecosystem. Measures to stabilize the power grid will be prepared to address the intermittency issues of renewable energy. Solar and wind power generation fluctuate depending on weather and time, and have been criticized for not being reliable power sources. Coal power, which the previous government planned to phase out completely by 2050, will be 'rationally reduced' considering supply-demand conditions and the power grid. These power source shares will be reflected in the '10th Basic Plan for Electricity Supply and Demand,' to be announced at the end of this year.

◆Fiscal Deficit Within 3% of GDP and National Debt Target in Mid-50% Range＝The government held the '2022 National Fiscal Strategy Meeting' on the 7th and set a goal to manage the fiscal deficit ratio based on the management fiscal balance within 3% of GDP and to keep the national debt ratio in the mid-50% range by 2027. The fiscal deficit based on the management fiscal balance deteriorated from 2.8% of GDP in 2019 to 5.8% in 2020 due to COVID-19, 4.4% in 2021, and 5.2% based on the first supplementary budget in 2022, but the government plans to normalize it to pre-pandemic levels.

The national debt ratio will also be managed to not exceed the mid-50% range by 2027, up from the current 50.1%. According to the '2021-2025 National Fiscal Management Plan' submitted by the previous government to the National Assembly, the national debt ratio was projected to be 58.8% in 2025. The government aims to lower this target to the mid-50% range by 2027 through expenditure efficiency and strengthening fiscal soundness. Furthermore, the previous government's fiscal rules will be abolished, and a simpler and stricter fiscal rule will be introduced to maintain the fiscal balance annually within -3% based on the management fiscal balance. Through this, the government will shift from the previous administration's government-led growth and 'expansionary fiscal policy' during COVID-19 to a 'sound fiscal policy,' aiming to restore the rapidly deteriorated national finances.

◆Foreign Exchange Reserves Decline at Largest Rate Since Financial Crisis＝According to the 'End of June Foreign Exchange Reserves' statistics released by the Bank of Korea on the 5th, South Korea's foreign exchange reserves stood at $438.28 billion, down $9.43 billion from the end of the previous month. This is the largest decline in 13 years and 7 months since November 2008 (-$11.75 billion) during the global financial crisis. Foreign exchange reserves have decreased for four consecutive months from $461.766 billion in February, $457.81 billion in March, $449.298 billion in April, and $447.711 billion in May. As a result, South Korea's foreign exchange reserves fell to the lowest level in 1 year and 7 months since November 2020 ($436.377 billion).

Recently, with the won-dollar exchange rate rising to around 1,300 won, the foreign exchange authorities appear to have used a large amount of foreign exchange reserves to defend the won's value, expanding the decline. The won's value is usually determined by the market, but when there are sharp fluctuations, the authorities intervene by buying or selling dollars using foreign exchange reserves to stabilize the market.