By Yoon Ja-young
Consumer price growth fell to below 1 percent in January, stoking worries of deflationary risks.
With the global economy suffering low growth and low inflation, economists say that only painful restructuring can pull the economy out of a deflation trap.
Consumer prices grew 0.8 percent from a year earlier last month, after rising 1.3 percent in December and 1 percent in November, according to data released by Statistics Korea, Tuesday.
With the exception of those two months, consumer prices rose by less than 1 percent for 11 consecutive months prior to November.
Chronic low prices can form a vicious circle of deflation. Falling total corporate sales can force wage stagnation, while consumers will delay purchases with the expectation that prices will fall further. Low prices will cut corporate sales and slash jobs and income, leading to further lowered consumption. Businesses also delay investments, hurting the vitality of the economy.
This phenomenon is similar to what Japan suffered during its two Lost Decades of the 1990s and 2000s.
Kim Seong-hoon, a research fellow at the Korea Economic Research Institute (KERI), pointed out that Korea has suffered low inflation for quite some time, though it isn't experiencing deflation yet.
"The consensus among economists is that 2 percent inflation is ideal," he said. "The Bank of Korea has been targeting between 2.5 and 3.5 percent inflation, but recently lowered it to 2 percent. The current zero percent range inflation means it may as well be concerned about deflation."
Low prices have become a concern not only for Korea but also other major economies. Japan joined some European countries by adopting negative interest rates, and China has seen its production price index fall for 46 consecutive months as of December. As China shifts its focus to the domestic market, demand for natural resources is decreasing.
The World Bank said in its Commodity Markets Outlook report that low prices will continue.
"All main commodity price indices are projected to decline in 2016 relative to last year due to persistently elevated supply and, in the case of industrial commodities, weak growth prospects in emerging markets," said the report.
It expected energy prices to fall 25 percent from 2015, with oil prices projected to average $37 in 2016.
Moon Jung-hiu, an economist at KB Investment and Securities, said the current deflation is coming from both the supply and demand sides. "Deflation is coming from the oversupply of oil as well as globally sluggish demand."
He added that the protracted quantitative easing in developed economies has accustomed people to low inflation.
"Monetary easing aims at encouraging investments and consumption, but it isn't effective as low interest rates have become a chronic phenomenon," he said, adding that Korea cannot be an exception.
KERI researcher Kim said that monetary easing won't help Korea fight deflation.
"If it were two years ago, we could consider quantitative easing to stir monetary circulation and thereby cause inflation. However, the interest rates are already low and we can't lower them further while the United States has started raising theirs. Korea seems to be caught in a trap."
Moon at KB Investment and Securities said that restructuring seems to be the only solution.
"Many countries are sustaining growth through their service sectors as manufacturing is suffering oversupply due to falling oil prices and decreasing global trade. The oversupply in manufacturing should be controlled and restructuring can be the quickest way."
He said that restructuring isn't easy. "Restructuring takes time and pain. It involves layoffs, recognition of losses and closure of businesses that are in a deficit.
Government-led restructuring in the private sector may stir controversy. Even so, only the countries and businesses that engage in restructuring first will survive."
Consumer price growth fell to below 1 percent in January, stoking worries of deflationary risks.
With the global economy suffering low growth and low inflation, economists say that only painful restructuring can pull the economy out of a deflation trap.
Consumer prices grew 0.8 percent from a year earlier last month, after rising 1.3 percent in December and 1 percent in November, according to data released by Statistics Korea, Tuesday.
With the exception of those two months, consumer prices rose by less than 1 percent for 11 consecutive months prior to November.
Chronic low prices can form a vicious circle of deflation. Falling total corporate sales can force wage stagnation, while consumers will delay purchases with the expectation that prices will fall further. Low prices will cut corporate sales and slash jobs and income, leading to further lowered consumption. Businesses also delay investments, hurting the vitality of the economy.
This phenomenon is similar to what Japan suffered during its two Lost Decades of the 1990s and 2000s.
Kim Seong-hoon, a research fellow at the Korea Economic Research Institute (KERI), pointed out that Korea has suffered low inflation for quite some time, though it isn't experiencing deflation yet.
"The consensus among economists is that 2 percent inflation is ideal," he said. "The Bank of Korea has been targeting between 2.5 and 3.5 percent inflation, but recently lowered it to 2 percent. The current zero percent range inflation means it may as well be concerned about deflation."
Low prices have become a concern not only for Korea but also other major economies. Japan joined some European countries by adopting negative interest rates, and China has seen its production price index fall for 46 consecutive months as of December. As China shifts its focus to the domestic market, demand for natural resources is decreasing.
The World Bank said in its Commodity Markets Outlook report that low prices will continue.
"All main commodity price indices are projected to decline in 2016 relative to last year due to persistently elevated supply and, in the case of industrial commodities, weak growth prospects in emerging markets," said the report.
It expected energy prices to fall 25 percent from 2015, with oil prices projected to average $37 in 2016.
Moon Jung-hiu, an economist at KB Investment and Securities, said the current deflation is coming from both the supply and demand sides. "Deflation is coming from the oversupply of oil as well as globally sluggish demand."
He added that the protracted quantitative easing in developed economies has accustomed people to low inflation.
"Monetary easing aims at encouraging investments and consumption, but it isn't effective as low interest rates have become a chronic phenomenon," he said, adding that Korea cannot be an exception.
KERI researcher Kim said that monetary easing won't help Korea fight deflation.
"If it were two years ago, we could consider quantitative easing to stir monetary circulation and thereby cause inflation. However, the interest rates are already low and we can't lower them further while the United States has started raising theirs. Korea seems to be caught in a trap."
Moon at KB Investment and Securities said that restructuring seems to be the only solution.
"Many countries are sustaining growth through their service sectors as manufacturing is suffering oversupply due to falling oil prices and decreasing global trade. The oversupply in manufacturing should be controlled and restructuring can be the quickest way."
He said that restructuring isn't easy. "Restructuring takes time and pain. It involves layoffs, recognition of losses and closure of businesses that are in a deficit.
Government-led restructuring in the private sector may stir controversy. Even so, only the countries and businesses that engage in restructuring first will survive."
![[INTERVIEW] With '30 Days,' Kang Ha-neul finds new level of comfort in acting](https://img.koreatimes.co.kr/upload/thumbnailV2/83a5770de8d8420da3634fb8b78266c1.jpg/dims/resize/178/optimize)
![[INTERVIEW] ONEUS returns as 'mermaid prince'](https://img.koreatimes.co.kr/upload/thumbnailV2/8cc3b8d992cd4b8bb43395b014670ca2.jpg/dims/resize/178/optimize)
