South Korea's Inflation Accelerates to a 10-Year High

By William Sim

Aug. 1 (Bloomberg) -- South Korea's inflation accelerated faster than expected in July to the highest in almost 10 years, adding pressure on the central bank to raise interest rates.

Consumer prices jumped 5.9 percent from a year earlier, following June's 5.5 percent increase, the statistics office said in Gwacheon today. That's higher than the 5.7 percent median estimate of 17 economists surveyed by Bloomberg News. Prices gained 0.7 percent from June.

Record fuel and food costs are stoking inflation across Asia, prompting policy makers in India, Indonesia, Taiwan, the Philippines and Thailand to boost borrowing costs even as the region faces fallout from a global slowdown. The Bank of Korea has kept rate unchanged this year and Governor Lee Seong Tae said last month inflation will be high for a ``significant period'' and economic growth will slow.

``A rate rise seems necessary to prevent inflation expectations from rising,'' said Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul. ``A further increase is unlikely, but it depends on oil prices.''

Governor Lee and his colleagues kept their benchmark rate at 5 percent on July 10 as they sought more time to weigh the threat of faster inflation against the risk of slower economic growth. The bank last raised rates in August 2007, and the next decision is due Aug. 7.

The central bank aims to keep inflation between 2.5 percent and 3.5 percent, on average, for the three years to 2009.

Core Inflation

Core inflation, which strips out oil and food costs, gained 0.5 percent from June and 4.6 percent from a year earlier, the biggest annual increase since July 1998.

The won fell 0.2 percent to 1,014.50 won versus the dollar at 1:30 p.m. in Seoul. The five-year government bond yield declined 4 basis points to 5.82 percent. The Kospi stock index dropped 1.5 percent to 1,570.70.

Prices for oil products jumped 35.5 percent in July from last year, pushing up costs for industrial goods by 11.4 percent today's report showed. Industrial goods include televisions, gasoline and cars.

GM Daewoo Auto & Technology Co., General Motors Corp.'s South Korean unit, said yesterday it will raise domestic vehicle prices by about 2 percent on average to recoup higher costs for steel and other raw materials. Korea's biggest carmakers, Hyundai Motor Co. and Kia Motors Corp., said earlier last month they would boost prices.

Inflation Focus

President Lee Myung Bak has shifted his priority to fighting inflation from spurring economic growth as his popularity slumps amid public anger over soaring living costs and his decision to lift a ban on U.S. beef imports.

Faster inflation is eroding confidence and domestic demand by eating into household incomes and squeezing corporate profits.

The economy expanded 4.8 percent in the second quarter from a year earlier, the slowest pace in more than a year. Spending by households, which are burdened with record debt, fell 0.1 percent in the quarter, the first decline in four years.

Factory output rose 6.7 percent in June from a year earlier, the smallest gain in nine months. Sales of consumer goods fell 1 percent, the first drop in two years. A leading index of economic indicators, which forecasts business activity, rose 1.2 percent from a year earlier, the smallest gain in five years.

Increased shipments to China and other emerging markets will help keep South Korea's economy from cooling too much as domestic demand slows, the Bank of Korea said on July 1.

Overseas shipments, which make up more than half of gross domestic product, surged 37.1 percent in July from a year earlier, the most in four years, the Ministry of Knowledge Economy said today.

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net