Korea to hike electricity prices by 5.4% on 21 November

What are the domino effects?

According to Nomura, the Korean government announced that it would raise electricity prices by an average of 5.4%, effective 21 November 2013.

This follows a hike that averaged 4% in January 2013. Price hikes vary from industrial plants and buildings (6.4%) to households (2.7%) and farms (3%).

Here's more from Nomura:

The government estimates that electricity price hikes will increase CPI and PPI inflation by 0.056 percentage points (pp) and 0.161pp, respectively.

Our recent report (see 2014 Korea outlook: Catching up with global growth, 13 November 2013) states that we expect the government to hike some utility prices in an effort to manage public debt. We think that the currently low CPI inflation rate (0.7% y-o-y in October) provides the government with some space to hike public service prices.

We believe that CPI inflation will bottom out soon and then rise to 3% y-o-y in Q4 2014, as disinflationary factors fade. Furthermore, reflecting solid inflation expectations, nominal wages continue to rise, which is also supported by planned minimum-wage hikes (7.2% in 2014, up from 6.1% in 2013).

The growth rate of food and energy prices tends to mean revert. Also, we expect Statistics Korea to remove free schooling and free school lunches from the CPI basket in December 2013. In sum, we expect CPI inflation to rise from 1.2% in 2013 to 2.6% in 2014 and believe that deflation fears are largely overdone