[Why&Next] Prices Stabilize... Variables Are 'Yuga·Extreme Weather'

Second Half Inflation Rate Expected to be in the 2% Range
Government Anticipates Stable Price Trends
Concerns Over Middle East Situation and Heatflation Remain

The inflation rate in the second half of the year is expected to remain stable in the 2% range. However, fluctuations may vary depending on external factors such as oil price volatility and abnormal weather, making it difficult to make definitive predictions. To strengthen inflation control, fiscal spending needs to be expanded, but there are concerns that policy measures may be limited as the government tightens fiscal soundness. Climate change, which is gradually becoming a constant rather than a variable, is also increasing the government's concerns.

According to the Ministry of Economy and Finance and the Korea Development Institute (KDI) on the 12th, expectations are growing that inflation will show a stable trend in the second half of the year. The government forecasts the inflation rate in the second half to be in the low to mid 2% range, while last month's Consumer Price Index (CPI) rose by 2.6%. Although the rate increased by 0.2 percentage points compared to the previous month, the Ministry of Economy and Finance evaluates this as a relatively stable trend.

An official from the Ministry of Economy and Finance explained, "The inflation rate rose to the 6% range in June 2022 and fluctuated thereafter, but has remained in the 2% range for four consecutive months since April this year, indicating a stable trend." He added, "The Bank of Korea sets the inflation stabilization target at 2%, and a rate in the low to mid 2% range is close to this target."

The consumer price inflation rate was in the 3% range only in February (3.1%) and March (3.1%). However, from April (2.9%) to May (2.7%) and June (2.4%), it recorded inflation rates in the 2% range. These positive figures have appeared consecutively as the Bank of Korea has set the inflation stabilization target at 2%.

However, external factors that directly affect inflation are difficult to be optimistic about. The instability in the Middle East increases the possibility of greater volatility in international oil prices, which can directly impact domestic petroleum prices. Abnormal weather, such as climate change causing food prices like agricultural products to soar and raising concerns about heatflation (heat + inflation), also increases the uncertainty of inflation forecasts.

Kim Beom-seok, the first vice minister of the Ministry of Economy and Finance, emphasized at the inflation-related vice ministers' meeting on the 9th, "The situation is highly uncertain due to increased volatility in international oil prices and abnormal weather during the summer," adding, "(Relevant ministries) must maintain heightened vigilance and strive to stabilize prices of their respective items."

Excluding items with high external volatility, inflation is showing a stable trend in the low 2% range. The core inflation rate, excluding food and energy, has been in the 2% range since November last year. From May to July, it recorded 2.2% for three consecutive months, maintaining the low 2% range. The domestic core inflation index, excluding agricultural products and petroleum, has also stayed in the 2% range throughout this year since January, recording 2.1% last month.

Experts agree that government policy responses are crucial to minimizing the impact of external factors. However, there are also views that the government may find it difficult to act as a buffer in the second half of the year due to weaker fiscal conditions compared to the first half. Woo Seok-jin, a professor of economics at Myongji University, said, "The government has no fiscal leeway," adding, "Since a significant amount of early spending focused on social overhead capital (SOC) was made in the first half, it seems difficult to respond in the second half."

Regarding the trend of increasing inflation volatility due to climate change, such as the gold apple incident, there are calls for more fundamental solutions. A KDI official explained, "If we consider climate change as a continuing trend, we need to discuss suitable measures for supply stabilization across various sectors," adding, "It is not just an inflation issue but also involves various problems including farmers, making it difficult to find solutions."

Meanwhile, KDI recently forecasted this year's consumer price inflation rate at 2.4%. This is a downward revision from the previous forecast (2.6%) reflecting domestic demand sluggishness and falling international oil prices. The core inflation rate was also revised down to 2.2% from the previous forecast of 2.3%.