South Korea's inflation buoyed by consumer spending

Inflation is at a five-year low in South Korea and the economy is still emerging from an extended slump in consumer spending, yet the central bank is talking of raising rates as soon as next month. The reason is that despite low inflation, a stalling currency and high oil prices mean things could change very quickly.
"It's possible that Korea's inflation rate could be double its current rate by the end of the year," said Rob Subbaraman, an economist with Lehman Brothers in Tokyo.
"The cost-pull pressures on inflation remain strong and the demand-push price pressures are building up." The annual inflation rate in South Korea, the world's fourth-largest crude oil buyer, fell to a five-year low of 2.0 percent in August from 4.8 percent a year earlier.
The fall in inflation, as measured by the consumer price index, happened despite a 47 percent jump in the price of Asia's benchmark Dubai crude in August from a year earlier.
Inflation has been rising elsewhere in Asia. Taiwan raised rates on Thursday, and Indonesia recently raised rates twice in a week to calm markets worried about an oil-induced crisis.
In Thailand, high oil prices have driven inflation to a seven-year high. The central bank has raised rates seven times since August 2004, most recently by 50 basis points last week.
South Korea has so far been insulated from higher oil prices by solid gains in the won - the average daily close in August was 13.4 percent higher than a year earlier - and a tax system that does not react much to oil price changes. "The disinflationary impact from the strong won is fading, the domestic-demand inflationary pressure is building and there's a growing risk of high cost of oil being passed through to consumers as well," said Subbaraman.
The won's rise has stalled this year. Its average closing rate for August was only 2.9 percent higher than last December.
Companies have been unable to pass on higher prices to consumers because of a sustained downturn in domestic demand that is only now ending and competition from cheap imports from China.