Deflation, low consumption haunt economy

Top, gasoline price boards taken in November and December, show oil prices falling. Cheongryangri Agricultural Market in Seoul looks deserted, Tuesday, amid a protracted economic slowdown. / Yonhap

By Yoon Ja-young

Consumer prices rose 1.3 percent this year, far lower than the central bank’s yearly inflation target of between 2.5 and 3.5 percent.

With inflation at its lowest level since 1999, concern is growing that the country may enter deflation amid extremely low consumption and plunging oil prices.

According to Statistics Korea, consumer prices rose 0.8 percent in December, the lowest since September 1999.

Consumer prices rose an average 1.3 percent this year. In 2011, they rose 4 percent, but slowed to 2.2 percent in 2012 and 1.3 percent in 2013 and this year.

The Ministry of Strategy and Finance attributed the low inflation to good harvests and a fall in global oil prices. Prices of agricultural products fell 2.7 percent, while oil products dropped 4.3 percent. Dubai crude is trading at below $60 per barrel, the lowest level since 2009.

“Inflation will pick up to 2 percent next year because of improved domestic demand and the cigarette price hike,” said Sohn Woong-ki, an official in charge of inflation policy at the ministry.

The government is raising cigarette prices by 2,000 won a pack from Jan. 1.

However, economists point out that sluggish economy is behind the low inflation.

LG Economic Research Institute economist Lee Geun-tae warned that deflation could follow if low inflation continued and the economy failed to revitalize itself.

Hyundai Research Institute research fellow Lim Hee-jung said businesses were refraining from fully reflecting the production costs of their products due to the negative economic conditions.

“Sluggish consumption and investment could drive the economy toward deflation,” he said.

The most feared scenario is Korea following Japan’s deflation experience.

As Japan went through its “lost two decades,” the Nikkei 225 index fell from near 40,000 in early 1990 to below 9,000 in 2002. Land prices also fell more than 50 percent.

Falling asset values led to many bankruptcies and the economy fell into recession.

Korea Development Institute researcher Lee Jae-joon called for more aggressive monetary policies.

“As the economic slowdown and low inflation have persisted for a considerable time, we cannot exclude the possibility of deflation,” he said.

“The central bank should try to meet the inflation target,” he said. “If the deflation becomes permanent, it will have a seriously negative effect on debt or the government’s fiscal health.”

“There will be few effective policy measures to cope with this once it occurs,” he said, calling for preemptive measures.