War against inflation is not over yet

An array of new words are born in the era of surging prices. Shrinkflation and skimpflation are types of inflation where companies reduce a product’s size and component content, respectively, while maintaining its selling price. Likewise, bundleflation refers to a deceptive strategy of pricing bundle-type products higher than single items. This is how you may end up falling victim to the consequences of rising prices at a grocery store. Not only with that, but streamflation is also happening as over-the-top (OTT) media service providers charge subscribers a higher price.

Such deceptive pricing policies are only one of the many examples showing how difficult it is to brake inflation. A recent study by the Bank of Korea pointed out that the pricing and salary setting changes have slowed down dis-inflation.

Increasing prices are a global trend putting most countries under pressure as they face a shrinking working-age population due to population aging, rising agricultural commodity prices, and increasing production costs amid the trends of de-globalization. Honorary professor Charles Goodhart at the London School of Economics expects that over the next 30 years, people will save less and spend more due to the aging population unlike the previous 30 years of low interest rates, adding that it will be the era of high-interest rates and rising prices over a long term.

Although inflation is a global trend, each country has different issues and conditions, which require them to respond differently. South Korea's consumer prices in October rose 3.8 percent, outpacing that of the United States (3.2 percent) for the first time in six years and two months since August 2017. Likewise, South Korea lags behind in terms of the slowdown of inflation. For example, it saw a smaller monthly average decrease of 0.19 percent points from last year’s peak of prices to September compared to the United States (0.36 percent points) and Europe (0.57 percent points). Unlike the United States with a greater food and energy self-reliance, South Korea has a higher level of foreign dependency and is more fragile to higher exchange rates. Additionally, it feels the pressure to raise home energy prices, which have been kept at bay for a while. Compounding the problem of high prices, the South Korean labor market lacks flexibility and there is less market competition compared to the United States.

As food and other prices rebounded, the Bank of Korea kept the key interest rate unchanged on Thursday, raising inflation expectations for this year and next year to 3.6 percent and 2.6 percent, respectively. In other words, there seems to be a slim chance of reaching the two percent inflation target until late next year. With this being the case, inflation will likely be “sticky” over the long term.

It is never an easy job to curb inflation. The International Monetary Fund (IMF) said in a report issued in September that only 64 out of 111 cases of inflation (57.6 percent) in 56 countries from 1970 to the present ended up being under control within five years. Only 12 cases, or 10.8 percent of inflation, were resolved in a year. The IMF advised that the key to holding back rising prices lies in implementing consistent austerity measures, adding that it may be too early to relax austerity policies even with signs of a slowdown of inflation. In this sense, “Keeping at It,” the title of a memoir written by former Fed Chairman Paul Volcker, who worked on the front lines of addressing inflation, gives a lesson to the South Korean monetary authorities.