By Kim Tae-gyu
Staff Reporter
Almost all professional economists agree that consumer prices will fall in Korea in tune with the global credit crunch and the resultant financial crisis. But they don't agree on how much.
If prices fall but rates remain positive (disflation), it might be good for the economy. But if the overall price level ends up plunging into negative territory (deflation), it would weigh heavily on the nation.
A vast majority of experts appear to predict a more favorable disflation, or slowdown in the inflation rate, will take place next year, but some warn of deflation.
The opposite of inflation, deflation refers to a decline in general price levels while disflation means reduced inflation. For example, if a rise in prices falls from 5 percent to 2 percent, it is disflation but not deflation because the percentage is still positive.
``The market consensus is that the overall price level will dip by about 2 percentage points from today's 4.8 percent to 2-3 percent in 2009,'' Korea Development Institute economist Kim Young-il said.
``The inflation rate of around 2-3 percent would be good enough for Korea's economy. In this sense, disflation would be welcomed as long as it does not translate into deflation,'' he said.
The Consumer Price Index (CPI) rose 4.8 percent last month from the same period last year. The figure has dived from 5.9 percent in July to 5.6 percent in August and 5.1 percent in September.
However, it is still substantially higher than developed countries such as the United States, where the specter of deflation looms large as its prices fell 1 percent in October after no change in September.
As the most popular measure of inflation, CPI gauges prices of goods or services eventually on offer, compiled every month by the Ministry of Strategy and Finance (MOSF).
``It is a long shot for the Korean economy to suffer from deflation. We expect a slowdown in inflation but the rate would be by no means negative,'' said an MOSF director, declining to be named.
``Our economy has never suffered from deflation since 1965, when we started compiling the relevant data. We will be sure to face disflation but not deflation,'' he said.
In economics, there are two negative situations, high inflation and joblessness. The former is a headache when the economy picks up while the latter is a problem during the downturn.
Those two things hardly happen at the same time but if they do it is called stagflation, a combination of stagnation (joblessness) and inflation.
Along the same line, deflation that accompanies economic slumps seldom comes along with inflation. But if it does, it is touted as bi-flation.
``Asset deflation is ongoing here but inflation is not eradicated yet. I am afraid that our economy will confront bi-flation next year,'' Goodmorning Shinhan Securities economist Park Hyo-jin said.
``Deflationary pressure will intensify next year and the possibility of inflation will also lurk in ambush. In a nutshell, things will be really difficult next year,'' he said.
June Park, an economist at Woori Securities, concurs.
``The CPI has now increased almost 5 percent in Korea, which is much higher than the government's aim of 3 percent. In this climate, who can say the threat of inflation is gone?'' Park asked.
``We also expect the CPI to head south next year but we can't completely count out inflationary pressure, especially when it comes to commodities and not shares or homes,'' he said.
Indeed, bi-flation has taken place during the economic slump, when prices of commodities went up to cause inflation while those of assets such as shares or houses decreased to trigger deflation.
The phenomenon happened because the demand for commodities increased since people must consume to survive, even during recessions. Those of non-commodity assets were low.
Things are similar to bi-flation here _ over the past year, share prices in the Seoul bourse halved and the value of houses also substantially decreased, but the CPI growth rate is not as low.