EDITORIAL from the Korea Times on June 4)

Fears of Stagflation
Price Stability Key to Sustainable Economic Growth

Ostensibly consumer prices have maintained stability amid a recession driven by
the unprecedented global financial and economic crisis. But from now on things
will be quite different from the lower price trend. In other words, it is just a
matter of time before a sudden rebound in prices is seen. Consumers have already
begun to feel growing inflationary pressure as prices of daily necessities are
sharply rising.
According to the National Statistical Office (NSO), the consumer price index
edged up 2.7 percent last month from a year earlier, down from a 3.6 percent
increase recorded in April. It also marked the lowest rise since September 2007.
The NSO attributed the downward trend mainly to the declining prices of
oil-related products such as gasoline and diesel in the wake of a drop in
international crude oil prices.
But, there are growing fears about a reversal of the trend as crude prices surged
by nearly 30 percent to $60 per barrel in May, the steepest monthly rise since
March 1999. The price of copper, which is seen as sensitive to an economic
turnaround, also jumped 7 percent on the world market. It can be inferred that
the massive fiscal stimulus of many countries around the globe has created excess
liquidity, prompting investors to bet their money more on oil and other raw
materials.
More worrisome in South Korea is that prices of agricultural products climbed by
10.8 percent last month from a year before, increasing living costs. Prices of
cabbages, codfish and chickens skyrocketed by 107.1 percent, 44.3 percent and
41.1 percent, respectively. Manufactured consumer goods and other daily
necessities also showed tangible increases. This inflationary pressure is a far
cry from overall price stability. It means that people, especially lower-income
earners, are increasingly feeling the pain of financial burdens in addition to
wage cuts and job losses following the worldwide crisis.
The real problem is that public service and utility charges are on the verge of
rising sharply. The state-run Korea Electric Power Corp. plans to raise its
charges by 4.5 percent this month and an additional 9 percent by the end of the
year. City gas prices are also expected to go up. Taxi fares in Seoul and Incheon
were hiked by 12.6 percent and 18.2 percent, respectively, on June 1. The
Gyeonggi provincial government also plans to increase taxi fares soon.
Pessimists even see the end of price stability. The Korean economy is expected to
suffer from a 2 to 4 percent contraction this year. If this contraction is
accompanied by a sizable price increase, the nation may have no choice but to go
through stagflation. It is ironical that deflation fears have suddenly evaporated
due to excessive liquidity caused by expansionary monetary and fiscal policies.
People have to worry about higher inflation even before the country sees an
economic recovery. Therefore, policymakers should go all-out to take preemptive
action to keep inflationary pressure in check so that the country can enjoy
sustainable growth.
(END)