By Yoon Ja-young
For the past several decades, consumer price management in Korea meant curbing inflation. Now the government is shifting its policy -- it aims at sustaining inflation of consumer prices at over 2 percent to fight deflation next year.
While announcing the 2016 economic directives, Wednesday, Strategy and Finance Minister Choi Kyung-hwan said the government will manage the nominal growth rate, taking into account not only the real growth rate but also inflation.
“In this way, we will work to avoid the global trend of low consumer prices and stop long-term low-growth,” Choi said.
The Bank of Korea set its target for consumer price growth, or inflation, at 2 percent. That is higher than the government’s expectation of 0.7 percent inflation this year or 1.5 percent inflation next year.
While consumers welcome low prices, these aren’t always good. First of all, low prices decrease total corporate sales, which in turn forces wages to be stagnant. As consumers expect prices to fall in deflation, they would delay buying things. It decreases corporate sales, and slashes jobs and income, leading to low consumption again.
The vicious circle of deflation comes as a big burden on the economy as Korea is shifting its emphasis to domestic consumption from exports amid the global economic downturn.
Kang Joong-koo, an economist at LG Economic Research Institute, said consumer prices reflect the health of the economy.
“While high inflation is in itself burdensome for the economy, low inflation is more like a signal. It shows that the economy is losing steam. That’s why we should be concerned about continuously low inflation,” he said.
The economist said that in Japan, both consumer prices and income fell when it was caught in deflation. “The falling indices were signals that Japan had lost its vitality. They made the wrong decision as they didn’t pay attention to these signals,” he added.
Park Jong-kyu, a research fellow at the Korea Institute of Finance, however, expects that prices won’t fall noticeably next year.
“The low prices we are seeing right now were triggered by falling global oil and crop prices, which cut costs for Korea. The low prices were positive for Korea in this regard.”
While some show concern over deflation, Park doubted whether it will last long. “Global oil prices can’t pull down consumer prices as much as they did last year as they have already dipped. If global oil prices stop falling, their impact on consumer prices will disappear next year.”
While the government is seeking to resuscitate the economy by boosting prices, it isn’t easy. The government may try to pull up the inflation index by cutting interest rates. However, as the United States started raising its key rate, it isn’t easy for Korea to go in the opposite direction.
“A key rate cut by the Bank of Korea will further increase household debt, which is already at a severe level. The government shouldn’t cut the key rate simply to pull up inflation,” Park said.
He said that the government should not cut energy prices in spite of the fall in global oil prices. “They froze energy prices during the era of high oil prices, which incurred a loss for state-run energy companies. If the government refrains from cutting energy prices now, it would make up for their loss as well as sustaining falling consumer prices.”
Kang said the government should focus on increasing vitality of the economy, which will in turn pull up inflation.
“If the government only tries to pull up consumer prices instead of boosting vitality, I don’t think such policies will work,” he added.