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updated: 9/1/2011 6:00 AM

South Korea's inflation rate hits three-year high

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Associated Press

SEOUL, South Korea -- South Korea's monthly inflation rate rose to its highest level in three years in August as price gains accelerate despite a series of interest rate hikes and slowing economic growth.

The country's consumer price index increased 5.3 percent from the same month last year as costs for food and transportation rose, the government's Statistics Korea said Thursday. That followed an increase of 4.7 percent in July.

The latest result was the highest since 5.6 percent recorded in August 2008 and marked the first time the index broached the 5 percent level since September of the same year.

South Korea is battling price pressures along with other countries including China, where inflation rose to a 37-month high of 6.5 percent in July.

The Bank of Korea, the country's central bank, has raised its benchmark interest rate five times since July 2010 in a bid to stem price gains. The BOK last raised its key borrowing cost in June and holds its next monthly policy meeting to set the rate on Sept. 8.

The surge in inflation comes as South Korea's economy, Asia's fourth largest, is slowing. Economic growth came in at 0.8 percent in the second quarter, weaker than the 1.3 percent recorded in the first three months of the year.

Separately, South Korea's trade surplus shrank sharply to $821 million in August from $6.3 billion in July as imports rose 29 percent to a monthly record high $45.56 billion due to sharp increases in prices for crude oil, gas and coal, according to the government's Ministry of Knowledge Economy. Exports increased 27 percent to $46.38 billion.

Inflation has now accelerated for three straight months and has been outside the Bank of Korea's stated comfort zone for price increases every month this year.

The central bank's inflation target is 3 percent, but it recognizes a "tolerance range" of plus or minus one percentage point from that level. The consumer price index, however, has exceeded 4 percent -- the upper end of that range -- for eight months.

Kwon Young-sun, an economist at Nomura International in Hong Kong, said the August increase was driven by a temporary surge in vegetable prices due to heavy rains.

"We expect CPI inflation to slow sharply next month, but to remain above the Bank of Korea's 4 percent target ceiling," he wrote in a report.

The BOK in July raised its inflation forecast for 2011 to 4 percent from its previous outlook of 3.9 percent.

The International Monetary Fund last month called for higher interest rates in South Korea to bring down inflation and protect the country's economic recovery.

So-called core inflation, which strips out volatile agriculture and oil prices, also accelerated in August, increasing 4 percent from the year before, Statistics Korea said. It had risen 3.8 percent in July.

The overall consumer price index rose 0.9 percent in August from July.

Nomura's Kwon said that the BOK is unlikely to raise its benchmark borrowing cost until February of next year, given the more benign outlook for inflation and the slowing economy.