The Korea Herald


[Editorial] Price shock

Room for maneuver limited; all must try to avoid vicious circle of inflation

By Korea Herald

Published : June 7, 2022 - 05:30

    • Link copied

Consumer prices jumped 5.4 percent in May from a year ago. It was the highest figure in 13 years and nine months after August 2008 when prices rose 5.6 percent. Surging international prices of crude oil and grains among others pushed consumer prices up sharply.

The future looks dismal.

The Bank of Korea expected prices to keep climbing in a 5 percent range in June and July.

The government has suppressed fees of public utilities such as electricity and gas but if they are readjusted to a realistic level, a further price rise will be inevitable.

Trade balance remained in the red for two straight months in April and May. The central bank revised down its growth forecast of gross domestic product for this year from 3 percent to 2.7 percent. In this dire situation, inflation accelerated.

Signs of stagflation -- a high inflation amid slow economic growth -- are bubbling up. Inflation is forecast to remain high for some time due to prolonged war in Ukraine, supply chain disruptions and other factors.

High inflation is not an issue proper to South Korea. The US Federal Reserve increased the benchmark interest rate by 0.5 percentage point last month to combat inflation and is expected to take two more “big steps” in the second half. The European Central Bank is projected to take a 0.5 percentage point big step for the first time in 22 years possibly next month.

The Bank of Korea has raised the benchmark interest rate five times since August last year, by 0.25 percentage point each time, but rather inflation gained speed. The central bank may have to take a “big step” of raising the rate by 0.5 percentage point in one go.

Industrial output, consumption and investment declined together for the first time in two years and two months in April. The nation’s growth engine is running low amid climbing prices. The government should try to revive the economy without stimulating inflation, but there is little room for maneuver.

If it borrows money to boost the economy, an increased currency in circulation will push up market interests and prices. Furthermore, the national debt is approaching 1,000 trillion won ($803 billion). Be that as it may, it is hard to lower interest rates to stimulate economic recovery. If Korea does not raise interest rates when the United States does, foreigners will move their funds out of Korea, dampening stock prices and depreciating the Korean won. If the US raises the benchmark rate, Korea cannot but follow suit.

Fiscal and monetary options effectively ran out. One of the ways to fight high inflation and low growth in this situation is to vitalize companies. Conditions should be more conducive for their active investment and business expansion. They can revive the economy and create jobs.

However, companies face worsening external conditions such as rising prices of materials and disrupted supply chains. Internally, they are under pressure of wage increase. Citing high inflation, workers will demand sharp hikes in wage, prompting management to raise product prices. Once this process activates, the economy will likely fall into the spiral of inflation.

Labor should refrain from demanding wages excessively and companies from raising product prices -- for some time. If they improve productivity, they could reduce inflationary pressure.

The government should do its part. It must consider reducing corporate and earned income taxes and utility fees to lessen financial burden on households and companies. It also ought to devise measures to protect the people most vulnerable to high inflation.

It must push boldly for labor and public-sector reforms, among others. Particularly unions of large companies need to rein in their demands.

Also, there should be no policy disharmony between fiscal and monetary authorities. It would be a wild goose chase if one increases expenditures while the other withdraws currency.

All economic players must make concerted efforts to fight high inflation.