Korea’s inflation in August dropped by 0.04 percent from a year earlier, making it the first-ever negative figure since statistical data were first compiled in 1965, according to Statistics Korea’s reports on Tuesday. After Korea's consumer prices increased 0.8 percent year-on-year in January and hovered below one percent threshold from February to July, the nation saw negative consumer price growth last month. The Ministry of Strategy and Finance and the Bank of Korea explained that consumer prices went down due to some temporary factors on the supply side such as falling prices in agriculture, fisheries, livestock and oil, adding that the Korean economy is not going through deflation, a long-term decline in prices caused by a contraction in demand.
Nevertheless, some economists diagnose that the current low prices are attributed not only to temporary supply factors but also to decreases in demand caused by an economic downturn. The South Korean government should not ignore a warning sign that fears of deflation can materialize in Korea with an economic recession and low prices over the long term just as Japan’s “Lost Two Decades” hit the economy. People in general may be deeply concerned about inflation, but South Korea could face deflation for the first time ever, which is even worse. If that is the case, a vicious circle could be inevitable: consumer and investment sentiment can shrink; sales will go down; inventories pile up; business lower goods prices.
BOK Governor Lee Ju-yeol said a few days ago that foreign risks have recently grown such as the worsening Washington and Beijing trade conflicts, implying that it will not be easy to achieve the potential growth rate of 2.2 percent this year. Not to mention the governor’s comment, unfavorable conditions abroad are being witnessed one after another such as the economic conflict between South Korea and Japan, disagreements over Brexit and financial risks from emerging economies. What’s worse, the Korean economy is losing steam at a greatly fast pace. Manufacturing production capacity index has been on the decrease for 12 consecutive months, recording the longest period of declines. Retail sales have gone down by 0.9 percent from a month earlier.
It is safe to say that things are bad enough in the South Korean economy given that the government plans to announce measures to revitalize domestic demand in consumption and tourism. Unfortunately, South Korea is experiencing comprehensive economic lethargy even if it is not as severe as a full-scale deflation yet. Businesses shun aggressive investment at home, but instead are seeking to shifting their attention to overseas markets. Even worse, SMEs and self-employed individuals lament over the economy. The government should put all kinds of effort into improving the economy not only by boosting domestic demand but also by addressing finance, fiscal affairs, taxation and regulation reform. Public fears of deflation will naturally be mitigated only when the government makes such a comprehensive effort.