Consumer prices rose by 2.3 percent, the biggest growth in three years and eight months, in April, according to Statistics Korea. Rising prices were driven by increases in prices of raw materials and agricultural products, exceeding the government’s inflation target of 2 percent. If the money released on the market keeps simulating prices, the possibility of inflation could also increase. If inflation occurs, a corresponding increase in interest rates takes place, raising the burden of interest payment for households and businesses. The problem is that if prices and interest rates increase before the economic recovery gets on track, the country could suffer from high interest rates and economic recession.
Ordinary people, already reeling from the pandemic, have taken the brunt of rising prices. Prices, ranging from groceries, such as spring onions, eggs, and meat to gasoline and water bills have soared. If interest rates rise on top of everything else, ordinary people could be pushed to a corner.
Although the Bank of Korea (BOK) has not revealed plans to raise interest rates, they are already on the rise in the market. According to BOK, interest rates on housing loans across banks increased for the seventh consecutive month and interest rates on credit loans rose for two straight months in Mar. Despite the increase burden on interest rates, credit loans from major banks increased by almost seven trillion won in Apr. Although the increase was largely affected by the initial public offering (IPO) of SK IE Technology (SKIET), there seemed to be a considerable demand for debt investment meant for cryptocurrency investments. With household debt already exceeding 1,000 trillion won, households could become insolvent if interest rates rise.
The government argues that concerns over inflation are excessive and prices will stabilize in the latter half of the year. However, considering that households have become vulnerable due to a drop in income and an increase in debts, excessive optimism can lead to a crisis. If households are severely impacted by a rise in interest rates, it could result in weak domestic demand and financial instability leading to a delay in economic recovery. The government should carefully examine whether money poured into the market as a measure of fiscal expansion stimulates inflation and refrain from injecting cash into the market. For their part, households and businesses should also have more caution about hikes in interest rates and manage their debts.