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Inflation dampens consumer sentiment

Jan. 26, 2011 - 18:44 By 황장진
Public optimistic but worried about future price increases

Korea’s consumer confidence declined in January as higher inflation is feared to hurt the livelihood of low- and middle-income households, the central bank said Wednesday.

The outlook for inflation reinforced the widespread expectation for another interest rate increase as early as in March.

The consumer sentiment index ― a gauge of consumers’ overall economic outlook, living conditions and future spending ― edged down to 108 for January from 109 seen in December, according to the Bank of Korea.

The January numbers marked the lowest reading since an identical 108 registered in October last year. The survey, based on a survey of 2,132 households in 56 major cities, was conducted from Jan. 13-20.

A reading above the benchmark 100 means optimists outnumber pessimists. The index, widely used to gauge the future direction of private spending, has stayed above the 100-point level since May 2009.

“Concerns about the slowing economy and growing inflationary risks dented consumer sentiment,” said Jang Wan-sub, an official at the BOK.

“Consumers hiked their inflation expectations amid concerns that the trend of higher consumer prices is likely to continue.”

A sub-index measuring inflation outlook came in at 153 in January, sharply up from 140 a month earlier and the highest figure since 160 seen in July 2008, the BOK said.

Korea’s inflation expectation rate reached an annual average of 3.7 percent in January, up from 3.3 percent the previous month, it noted. The January figure was the highest since 3.8 percent in July 2009.

The inflation expectation rate refers to consumers’ average expectations on inflation over the next 12 months. The BOK earlier forecast the nation’s consumer prices to grow 3.5 percent this year, up from 2.9 percent in 2010.

Separate central bank data also showed Asia’s fourth-largest economy expanded for an eighth consecutive quarter in the October-December period despite reductions in fiscal spending and corporate facilities investment at home.

Analysts said the latest set of figures reinforced the investors’ widespread view that the Bank of Korea would next raise interest rates in March or April after its unexpected increase in January aimed at taming inflation.

“The annual 4.8 percent growth is still in line with the potential growth rate and can prompt demand-side inflationary pressure,” said Kim Jong-su, an economist at NH Investment & Securities. “In this regard, the fourth-quarter growth rate backs the Bank of Korea’s policy of interest rate normalization.”

The Bank of Korea targets to keep the consumer inflation at an annual rate between 2 percent and 4 percent on average for the 2010-2012 period. The rate stood above the mid-point of 3 percent for the past four months in a row.

It raised the benchmark 7-day repurchase agreement rate twice last year by 25 basis points each ― in July and November ― and unexpectedly lifted it again this month to curb rising inflation

The central bank next reviews its policy on Feb. 11.

(From news reports)