Food Inflation at 11.6% Over One Year
A number of headlines from the news, who are telling us what we already know. Inflation is getting to be very painful in Korea.
Here are the headlines:
The difficult balance among inflation, foreign exchange rates, and interest rates continues. As the first two articles correctly state, much of the source of inflation is due to supply difficulties. The only way to combat supply issues, when those supplies originate from foreign countries is to have a stronger currency. A stronger currency is usually correlated with higher interest rates. The difficult position posed by this combination has already been explained early this year, and can be reviewed here.
Japan’s Tragegy = Bank of Korea’s Opportunity? Just Maybe
Oddly, the earthquake may provide the BOK some needed flexibility. How is that? Well, the fact is the Japanese will need to buy the Yen. The reason is that Japanese will need to bring back money back to Japan in order to pay for the massive human tragedy. Insurers will need to pay claims denominated in the Yen. In short, there will be demand for the Yen over time. Since the JPY/KRW exchange rate is the real mechanism through which Korean conglomerates have benefited, the Bank of Korea can allow the Korean Won to strengthen versus the USD, while not necessarily strengthening against the Japanese Yen. The result would be stronger purchasing power for the Korean Won to pay for more expensive raw materials and imported food. Of course, it cannot be that simple, and it will not be. The impact of the Japanese tragedy on global demand for end products (including Korean-made ones) is unknown. Nevertheless, the Bank of Korea may be able to allow a stronger Won in order to aid against the obvious inflationary pressures facing everyday Koreans.