Inflation worry in South Korea import price surge

South Korean import prices rose near their fastest pace in about four years in July, data showed on Friday, indicating inflation remains a key worry just a day after policy makers signalled a shift in priority towards growth.
The Bank of Korea surprised the markets by cutting interest rates by a quarter of a percentage point to a new record low of 3.5 percent on Thursday, choosing to put aside inflation concerns amid worries the economy could lose momentum if exports cooled and oil prices stayed high.
Higher global raw material and oil prices are a particular headache for Asia's third-largest economy, which has few natural resources and is the world's fourth-biggest oil buyer.
"Under low interest rates and rising oil prices, high inflation is likely to stay with Korea for a while," Andy Xie, an economist at Morgan Stanley, said in a research note.
"Soaring inflation could be particularly harmful to Korea as its active labour unions are likely to demand higher wages that can result in a wage price spiral," he said.
The result could be stagflation, an economic condition in which an economy suffers both low growth and rapidly rising prices.
Foreign investors say the militant South Korean labour unions are a key factor discouraging outside investment.
South Korean July import prices in won terms jumped 14.3 percent from a year earlier, led by a 16.7 percent rise in oil and raw material prices, the central bank said on Friday.
The rise was faster than a 12.4 percent rise seen in the year through June and was close to a 14.6 percent advance seen in May, the fastest since June 2000.
Bank of Korea Governor Park Seung said on Thursday surging oil prices would probably boost consumer prices by 1.5 percent and shave 1 percentage point from growth.
In a move to ease inflation, the ruling Uri Party said on Friday basic mobile phone rates would be cut by 7.8 percent from September. Some economists argued the rate cut could have come earlier, given stubborn weakness in domestic demand.
"In terms of policy effectiveness, it is probably a little bit late. I don't think 25 basis points is enough. They need to cut more aggressively if it is to have more effect," said Joseph Lau, an economist at CSFB in Hong Kong.
The authorities would not want to stimulate the economy aggressively with monetary policy while also increasing government spending, which they are also doing, he said by telephone.