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| A customer shops for vegetables and fruit, whose prices have risen sharply due to the summer heat wave, at a supermarket in Seoul, August 15. Yonhap |
By Park Hyong-ki
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The country's producer price index (PPI), a measure of business inflation, stood at 104.83 in July, up 0.4 percent from the previous month, according to the Bank of Korea (BOK).
This marks the highest in three years and 10 months and is being driven by rising prices of vegetables and fruit amid the prolonged summer heat wave. The price of spinach rose the highest by more than 130 percent in July from the month before, followed by that of cabbage at 90 percent.
The highest PPI was 105.19 in September 2014, but recently it has been climbing for eight straight months. The base number for the PPI is 100 which was set in 2010.
The rise in the index measuring the changes in the prices businesses receive for their output will affect consumption in the near future.
Consumer prices "almost perfectly mirror" producer prices as the PPI is unveiled by the central bank before Statistics Korea announces the consumer price index.
The record PPI is expected to entail inflation, which could hurt consumers' purchasing power going forward. This will, in turn, hurt private consumption.
"The market will see the effect of the PPI on consumption at the end of the year and early 2019. Private spending is going to drop, and thus add downward pressure to the economy," said Kim Doo-un, an economist at KB Securities.
He added the central bank will inevitably have to revise down its growth forecast another notch possibly in October. The BOK projects the economy to grow 2.9 percent this year.
The record low number of jobs created ― 5,000 ― in July also poses "worrisome risks" to the economy, analysts said.
"Past patterns show a low number of new jobs entailed weak domestic consumption," said Shin Dong-soo, an analyst at Eugene Investment & Securities.
Even though exports have mostly driven the country's growth, consumption still takes up about 60 percent of total annual output. Given its small size with a population of far less than 100 million, consumption is perceived as minor compared to goods sold abroad.
Private spending only grew 0.3 percent in the second quarter from a quarter earlier, according to the BOK.
Unemployment compounded by external risks stemming from the trade dispute between the United States and China could affect the central bank when it comes to setting its key base rate.
"It would have to be cautious in setting the pace and level of its monetary tightening, now that the country is experiencing a shock from the recent job data," Shin said.
BOK Governor Lee Ju-yeol hinted at the National Assembly that the bank could tighten its policy if consumer prices increase toward its desired level of 2 percent.
The finance ministry said recently it will push forward with a fiscal stimulus.
However, analysts say policymakers will have to prioritize devising and implementing policies to spur private investment and consumption.
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