Gov’t struggling to find anti-inflation measures that stick

Government struggling to find anti-inflation measures that stick

By Kim Tong-hyung

Talking the talk without walking the walk, the Lee Myung-bak government spent the past year jabbering away its credibility in its fight against inflation.

Nonetheless, bold comments have returned for 2012, but speechwriters at Cheong Wa Dae should admit their words carry little weight, much like consumers prices which continue to lose their sense of gravity.

The monthly conversations between President Lee and his top economic aides have become more circular than the script of ``Groundhog Day,’’ the movie that had Bill Murray waking up to the same day morning after morning.

Price stability is the top priority in economic policy for 2012, Lee and his lieutenants declared early this month, just as they said at the beginning of last year.

Authorities are also committed to boosting government spending to jolt growth, while tightening the purse strings on state coffers to improve fiscal health. It would be equally important, they say, to claw away at the country’s massive household debt mountain, and at the same time, make it easier for families to borrow to spend.

Confusing? You bet.

Still, one could be assured that, amid the spiraling and mismatched buffet of economic objectives, price stability will be treated with same excitement reserved for peanuts.

The choice between inflation and growth has always been an easy one for politicians, even more so in times like these when heightened uncertainties surrounding the world economy threaten to derail the country’s fragile recovery.

Despite displaying staggering ineptitude in taming inflation and halting the damage to savings and spending power, many observers would bet their houses that the Bank of Korea (BOK) will move to lower interest rates during the earlier months of the year to spark consumer spending.

The inflationary pressures of last year were driven mainly by the increases in fuel and food costs and also influenced by soaring rent, increasing services costs and growing household bills for utilities and transportation.

Consumer prices rose by 4.2 percent in December to put the annual inflation at 4 percent for the whole of 2011, according to government data. The core rate of inflation, which excludes the more volatile food and energy components and used by decision makers to gear policy, hit a 12-month high at 3.6 percent in December.

The government in November last year jiggled the country’s basket of goods and services to calculate inflation rates to reflect the changing nature of shopping behavior and influence of new technology. Under the contents of the old official shopping basket, the annual inflation for 2011 would have been measured at 4.4 percent.

The higher prices have been coupled with subduing economic activity, evidenced by the sharp pullback in industrial production and growing inventory at manufacturers.

Encouraging consumption would be critical for the Korean economy this year as its traditional strength in exports will likely be compromised by external influences, such as the eurozone debt crisis and slowing demand in the United States and Europe.

But with stagnant wages and unemployment eating into disposable income here, government efforts to stoke consumption will once again depend on encouraging households to take on more debt.

Recent ideas suggested by the Ministry of Strategy and Finance include pressuring banks to lower interest rates on loans and easing property-related taxes to boost house transactions. This could be a dangerous path to walk down when considering that Korean families already owe more money than the one quadrillion won the entire economy generates in a year.

Inflation exceeded the government’s 4 percent target every month last year except for October and this creates an ``inverted’’ base effect that makes it more likely for year-on-year headline inflation to decline in the next few months.

While softened inflation figures may allow BOK’s rate setters the wiggle room to lower borrowing costs, they shouldn’t be mistaken as an indicator for improving living standards.

``While it’s expected that the consumer price index (CPI), the country’s key measure of inflation, will be at the 3 percent level for January, the decline will be a product of a base effect rather than a real stabilization in consumer prices. The month-on-month numbers will continue to indicate growing inflationary pressure,’’ said Shin Byeong-gil, an economist at Solomon Investment and Securities.

``The Lunar New Year’s holidays during January will likely disrupt the balance in supply and demand for agricultural products and put food costs on the increase. Public services costs are continuing to rise and there could be volatility in fuel prices as well depending on the effects of international sanctions on Iran,’’ he said.

``So while a decline is possible in the headline inflation numbers, the real costs of living will continue to be on the rise and put a damper on consumption.’’

Clamping down on money supply isn’t an option in times like these, so government officials will once again rely on price controls to combat inflation. The results from past years, however, don’t inspire much confidence.

During the earlier part of Lee’s term, the government announced a list of 52 major items of consumption that were to be ``specially’’ monitored. The prices of many of the items have since increased faster than headline inflation anyways.

Authorities raised the ante in their administrative action last year, bullying companies in markets like energy, telecommunications and retail to keep them from raising prices for their products and services dramatically. However, as the CPI reading suggests, they don’t have anything to show for their efforts, which were starting to run up against the limits of acceptability.

It seems that anti-inflation measures will become even weirder this year. Perhaps out of sheer desperation, the government is now preparing to implement a ``real-name responsibility’’ system over inflation policies at the economy-related strategy and finance, and knowledge economy ministries.

Under the system, different senior-level officials are assigned to different consumer items and will be held personally accountable for the price changes in the items in the coming months.

Good morning, Mr. Cabbage and hello, Mrs. Shampoo. If this seriously is our best measure to tame inflation, then we may be in even more trouble than we thought.