Asia-Pacific

S. Korean economy faces demand-pull inflation

(Xinhua)
Updated: 2011-03-09 15:39

SEOUL - South Korea's economy is in danger of falling into demand-pull inflation, a state-run think tank said Wednesday.

Amid the continuing high rate of increase in the price of agricultural, livestock and marine products, inflationary factors in the supply side appears to persist, the Korea Development Institute (KDI) said in its monthly report.

Furthermore, the KDI noted services price, which largely reflects the factors in the demand side, rose 2.5 percent in February from the previous month, suggesting both supply and demand factors contributed to rising inflation.

Senior officials at the South Korea's finance ministry have recently expressed concerns over the demand-pull inflation, hinting that demand-pull inflation is emerging in the Asia's fourth largest economy.

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"Inflation stemmed mainly from supply-side shocks, such as higher oil prices and supply shortages of agricultural and livestock products caused by abnormal cold weather and the foot- and-mouth disease outbreak," South Korean Finance Minister Yoon Jeung-hyun said at a forum Wednesday.

"However, demand-pull inflationary pressures have been gradually building up, driven by inflation expectation and economic recovery," he said.

His remarks came ahead of the Bank of Korea (BOK)'s rate-setting meeting Thursday. The BOK is expected to raise its benchmark 7-day repo rate by 25 basis points to 3.00 percent in a bid to curb inflation expectations.

Vice Finance Minister Yim Jong-yong also mentioned demand-pull inflation, boosting expectations that the South Korean government is willing to allow the rate hikes for curbing inflation.

"Supply-side factors have mainly driven the nation's consumer prices higher, but it appears that sign of demand-side inflation emerges gradually," Yim told reporters last week after an anti- inflation meeting with heads of related ministries.

Rising prices of eating-out and accommodation stemmed from demand-side factors and inflation expectations along with supply shock in raw materials, Yim said, adding that demand-pull inflation needs to be addressed by macro measures.