South Korea’s producer prices are rising at alarming pace of 3 percent due to higher costs of labor, loans, and imports on top of unseasonable climate, a movement that can add supply-end inflationary pressure and spell a dangerous economic mix of stagflation against sluggish domestic demand.

According to data released by the Bank of Korea, Korea’s producer price index (PPI) in June rose 2.6 percent on year to 104.41 in June, a jump from 1.2 percent gain in January.

Wholesale price of goods that makes up 65 percent in the PPI basket hit 3.1 percent in June.

Given the import price data in July - gains of 1.7 percent on month and 12.2 percent on year for a near four-year high of 89.81, PPI is estimated to have hit above 3 percent last month.

The July PPI data is released on Aug. 21. Import prices have jumped due to higher oil prices and a weaker won against the U.S. dollar.

A strong rise in PPI tends to lead to corresponding movement in consumer prices two to three months later as higher product cost can translate into retail prices. It can further discourage consumer spending and further hurt the economy.

Multiple factors have driven up costs for producers and services providers. Wages have gone up 6.6 percent on year in January-May after the government pushed up minimum wage by 16.4 percent from the beginning of the year and forced more irregular workers to be converted to permanent payroll. The labor cost will climb further due to the cutback in workweek hours to 52 from 68 starting July and additional 10.9 percent hike in minimum wage from January next year.

Borrowing costs also have risen due to higher market yields tracking the interest rate increases in the United States. The average corporate loan rates went up to 3.63 percent in June from 3.37 percent in July last year.

The scorching heat also fanned producer prices. According to Hyundai Research Institute, fresh food prices jumped 8.0 percent on average when heat wave extended beyond the average of 4.3 days from 1991 to 2017. The mercury stayed above the normal point for 15.5 days in July alone.

By Kim In-oh and Lee Ha-yeon

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]