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Impact of looming inflation

Various commodity prices are surging, sounding the alarm for crucial industries, including manufacturing and construction. For example, iron ore prices topped $200 per ton last Thursday, pushing the prices of steel products, such as hot-rolled coils, pipes and plates, to record-high levels. Some construction sites had to suspend work due to the scarcity of rebar.

Faced with the price surge of commodities following semiconductors, the profitability of primary manufacturing industries, such as cars and home appliances, has fallen sharply. Large businesses are managing to absorb part of the shock, but many small- and medium-sized enterprises are considering closing. These SMEs are reeling from the double whammy — soaring labor costs caused by a sharp rise in the minimum wage and surging raw material prices.

Households are also keenly feeling the impact of looming inflation. Even before financial austerity sets in, lending rates have shown signs of rising. Banks’ mortgage rates increased recently by nearly 1 percentage point from July last year when they hit bottom. According to the Bank of Korea, if the lending rate rises by 1 percentage point, it will increase households’ aggregate interest payments by 11.8 trillion won ($10.6 billion) and owner-operators’ burden by 5.2 trillion won.

Nevertheless, unsecured loans extended by the big-five commercial banks grew by 6.8 trillion won in April alone, hitting the highest level in five months. We cannot help but worry about the nightmare of mass household bankruptcies turning into a reality.

The government should work out measures to minimize the looming inflation shock on the real economy. It ought to clamp down on the possible hoarding of commodities and agricultural products and prepare medium- and long-term supply plans for essential items. The financial authorities need to grasp the loan statuses of various financial services companies before interest rates rise sharply, and devise methods to stem the ripple effect of chain insolvencies.

Economic policymakers must keep in mind that if the worst-case scenario — inflation cripples the real economy and leads to the eventual collapse of the financial system — becomes a reality, it will cause irrecoverable damage to the economy.

Opinion

en-kr

2021-05-12T07:00:00.0000000Z

2021-05-12T07:00:00.0000000Z

https://ktimes.pressreader.com/article/281698322627587

The Korea Times Co.