Looming fears of global inflation

The global economy is engulfed in inflation. The rising cost of energy and food has pushed up U.S. consumer prices by 7.5% year-on-year in January, the highest in 40 years. The European Commission has estimated consumer prices in the Eurozone to grow by 3.5%. The situation is similar in Korea, where consumer prices are climbing at 3% for four consecutive months. The Bank of Korea is predicted to place consumer price estimations significantly higher than last year’s 2.5%.

To make matters worse, the inflation may stay for the longer-term. Recent inflationary pressures are evident across all areas, not only in gas and food prices. Oil prices have reached 100 dollars per barrel, due to global supply chain challenges from COVID 19 and limitations in expanding oil production. If Russia, who supplies 43% of the EU’s natural gas consumption, invades Ukraine, it may trigger an oil shock equivalent to the one that occurred in the 1970s. 　

When consumer prices go up, the biggest toll is taken on the lower income bracket. In the U.S., actual income is shrinking as consumer prices climb higher than wage growth, which is why U.S. President Joe Biden has declared to fight inflation. The pressures are also weighing in on Korean companies that are struggling with rising costs of imported materials and parts. As of last Thursday, Korea’s trade deficit has exceeded eight billion dollars, which is in stark contrast with the same period last year, when trade surplus recorded 954 million dollars.

The U.S. Federal Reserve may increase interest rates, which stands at zero, by 0.5 percentage point next month. Other governments and central banks around the world are steering direction to reduce fiscal expenditure and raise interest rates. Only Korea is oblivious to these circumstances, with presidential candidates offering pledges to spend welfare policies that amount to trillions of won. The government’s belated housing supply project, which spent more than 3 trillion won in compensating for new urban development projects, also contributed to inflation.

With highest oil dependency among OECD countries, Korea may suffer if high oil prices continue. If interest rates go up and bring down asset prices, this may impact consumption and thus raise risk for stagflation. Political parties cannot afford to turn a blind eye to such circumstances and pressure the government to expand supplementary budget without reducing previous budget expenditure.