Inflation Risk and Counter-Measures
Jin-Young, Chung, SERI Quarterly
Inflation risk, price indices, quantitative easing, speculative demand, Chinaflation
LOOMING INFLATION RISK
Domestic Price Trends
Major price indices like the consumer price index, producer price index, and import price index are showing an upward trend. Consumer prices in the first half of 2011 rose 4.3 percent year-on-year with those in August spiking 5.3 percent. In the first quarter, the raw material sector (including farm, livestock & fisheries, and petroleum) accounted for a substantial portion of the higher consumer prices, while in the second quarter the service sector was the main factor. The producer price index rose 6.6 percent year-on-year in the first half, driven by higher import prices for raw materials. After peaking at 19.6 percent in March due to strong raw material prices caused by political instability in the Middle East, the import price index returned downward thanks to stabilization of political turmoil coupled with a falling won-dollar exchange rate. As of August, the import price index was 10.0 percent higher than that of a year earlier.
Price hikes ignited by overseas supply shocks have led to higher service prices, and escalating upward pressure on consumer prices on the demand side. Service prices, which remained stable in 2010 (with an average growth rate of 1.9 percent), have increased sharply in 2011, growing by 3.0 percent in July. After remaining stable in 2010 at a rate of 1.8 percent, core inflation prices (excluding volatile food and energy costs) accelerated in 2011, with the rate rising to 3.8 percent in July 2011. This indicates that the basic trend in consumer prices, excluding temporary external shocks, is turning upward.
Main Drivers behind Recent Price Hikes
International prices of raw materials and agricultural products
An increase in international raw material prices has triggered hikes in domestic import and producer prices, thereby leading to an increase in domestic consumer prices. Thus, the increase in international raw material prices served as a main factor behind price instability.
Since the collapse of Lehman Brothers Holdings, international prices of raw materials have surged sharply on economic recovery led by emerging markets and fierce competition to secure raw materials among major commodity importers (including China). China's oil consumption rose approximately 10.5 percent in 2010, and accounted for an estimated 35.7 percent of the growth in global oil consumption. Against this backdrop, the per-barrel cost of Dubai oil climbed to $111.1 by the end of July 2011 after plummeting to $38.9 in December 2008. The international prices of copper and iron ore also marked robust increases.
Prices for agricultural and livestock commodities continued a marked rise due to poor harvests worldwide caused by a series of natural setbacks, including abnormal weather conditions and earthquakes, raising concerns over the potential for "agnation."
According to the Food and Agriculture Organization (FAO) of the United Nations, the food price index surged in the latter half of 2010, rising 39.1 percent from June 2010 to June 2011. In particular, prices for major agricultural commodities like soybeans, wheat, and corn rose sharply due to higher demand from fast-growing emerging markets (including China). In the 2010/11 planting season, global grain consumption is forecast to rise 2.2 percent year-on-year. In contrast, global grain production is likely to decline by 2.2 percent, while global grain inventories are expected to fall by 3.2 percentage points.
Against this backdrop, international grain prices are expected to maintain their upward momentum for the time being, largely because of excess demand. In addition, international prices for corn, soybean oil, and canola oil - major ingrethents of bio-ethanol and bio -diesel - are also showing signs of rising amid higher demand for bio-energy, which is gaining popularity as a fossil fuel alternative due to high oil prices. …