Concerns over S.Korean deflation rise on downbeat economic data

Concerns that the South Korean economy may fall into deflation escalated as recent economic indicators indicated a stagnant economy amid low headline inflation.

The country's consumer price inflation was 0.5 percent in February from a year earlier, staying below 1 percent for three months in a row. The figure marked the lowest in about 16 years, statistics data showed Tuesday.

The government said it was mainly attributable to cheaper crude oil, which pulled down petroleum product prices by 24.3 percent in February from a year ago.

But, the consumer price inflation actually posted a negative figure when excluding the effect of tobacco price hike, which raised the headline inflation by 0.58 percentage points last month. The government lifted average cigarette prices by a whopping 80 percent from the start of this year.

Adding to low inflation, recent economic data, announced on Sunday and Monday, boosted grim prospects of the economy.

Production in all industries reduced 1.7 percent in January from a month earlier, marking the biggest monthly fall since March 2013. Output in the mining and manufacturing sectors tumbled 3.7 percent, the largest decline since December 2008 when the global financial crisis affected the country.

Retail sales in January reduced 3.1 percent compared with the prior month, and exports, which account for about half of the economy, tumbled 10 percent in January.

The prolonged disinflation tends to delay consumption expenditure on expectations that consumer prices may fall further. It would result in a stagnant economy, especially in the domestic market, possibly leading to deflation, or the vicious circle of consumer price falls and economic slowdown.

Growing concerns about deflation may put more pressure on the Bank of Korea (BOK) to cut interest rates further. The BOK lowered its policy rate in August and October last year to a record low of 2 percent.

South Korea's consumer price inflation stayed below the BOK's mid-term target band of 2.5-3.5 percent for long.

Lee Chan-woo, director-general of Finance Ministry's economic policy bureau, told a press briefing Monday that interest rate cuts are beneficial to growth according to "economics theories," hinting at the need for further cuts in the policy rate.

Lee noted that the rate-setting depends on the BOK, adding that it would be hard for the South Korean economy to enter into deflation yet. Endi