Consumers shop for groceries at a supermarket in Seoul, Thursday. Yonhap
By Yi Whan-woo
A rebound in consumer inflation last month is stoking concerns that Korea may face the possibility of stagflation — a combination of stagnant economic growth and high inflation.
These concerns have gained traction, especially as the value of the Korean won remains persistently unstable against the dollar, staying well below the psychological threshold of 1,400 won.
A weaker won is driving up the prices of crude oil and other imported goods, which, in turn, are putting upward pressure on production costs and the prices of domestic goods.
“Consumer prices may continue to rise, and seriously dampen any cooling trajectory for inflation in Korea and the possibility of further stagflation,” Korea University economics professor Kang Sung-jin said.
The professor referred to Statistics Korea's announcement on Wednesday of a 2.2 percent increase in consumer inflation in January compared to a year earlier.
Consumer inflation had remained below 2 percent for the previous five months. As a result, the January figure marked the largest year-on-year increase since July, when it rose by 2.6 percent.
Among major goods, petroleum product prices rose 7.3 percent from a year earlier, marking the largest year-on-year increase since July, when they rose by 8.4 percent.
Statistics Korea attributed the surge in consumer prices to the volatile won-dollar exchange rate, which was caused by the political turmoil brought about by President Yoon Suk Yeol’s imposition of martial law in December.
The Bank of Korea (BOK) also analyzed that the exchange rate is contributing to uncertainties about inflation, noting that it will release an adjusted inflation forecast for 2025 later this month.
According to market observers, the Korean won trading at below the 1,400 level per dollar may become the new normal, a level previously only seen during the 1997 Asian financial crisis, the 2008 global financial crisis and the 2022 U.S. rate hike campaign.
Market observers' gloomy outlook comes as the Korean economy this year is expected to experience low levels of growth falling below 2 percent, with the trend likely to persist in the coming years.
Such low levels of growth were only witnessed in times of crisis, such as the COVID-19 pandemic.
Under these circumstances, U.S. President Donald Trump's threat to impose steeper tariffs on America's major trading partners is heightening concerns that the export-reliant Korean economy could be destabilized further.
Korea’s trade surplus with the U.S. amounted to $60.2 billion as of November, placing the country eighth on the list of nations with which the U.S. has a trade deficit, according to the United States Census Bureau.
Korea’s trade surplus was higher than the $54.8 billion posted by ninth-ranked Canada, which was one of Trump’s first targets in the tariff war.
Meanwhile, economists said that a possible supplementary budget aimed at stimulating lackluster private spending and supporting embattled exporters facing Trump’s tariffs could provoke further inflation.
The main opposition Democratic Party of Korea has repeatedly called for the allocation of an extra budget in addition to its regular 673.3 trillion won ($460.97 billion) budget for 2025.
The ruling People’s Power Party was previously against the idea, as it is opposed the government’s belt-tightening fiscal policy. But Rep. Ahn Cheol-soo of the ruling People Power Party proposed on Monday that 20 trillion won be allocated for a supplementary budget.
English (United States)