[Outlook]Balancing growth and inflation

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[Outlook]Balancing growth and inflation

Commodity prices have been increasing at an unusual rate since early this year. International oil prices have almost doubled compared to the same time last year and grainprices have more than doubled.
In February, prices of imported raw materials jumped by 50 percent from the same month last year.
Prices of other imported goods surged by 22 percent. Until October of last year, the rise had remained in the single digits.
This makes people worry about a potential increase in domestic commodity prices.
The consumer price index indicates that the cost of living increased by 2 percent until last year. But the index has since increased by 3 percent and will likely go up by 4 percent if the raw materials prices keep going up.
Rising commodity prices are not the only problem. With the U.S. economy slipping into a recession, the growth of the world economy is also slowing down. International economic institutions have been lowering growth forecasts. Korean economic research centers also lowered their estimates to 4 percent from last year’s 5 percent.
As commodity prices go up and growth slows down, policy makers have a difficult time setting priorities for running the economy. The government wants to achieve 6 percent growth while keeping inflation at 3 percent. But private economic research institutes say that to meet the inflation target, the growth target must be lowered to 4 percent. They also say achieving growth higher than 5 percent will be almost impossible.
The rising prices of ramen and jajangmyeon, noodles with black bean paste sauce, which had remained steady for several years, worry working-class and low-income people. The price of doenjang-jjigae, fermented soybean paste stew, hasn’t gone up but the side dishes that come with it are not as good as before. Thus office workers who usually enjoy the dish are left dissatisfied.
People worry that once commodity prices start increasing, they will just keep on going up. Sensitive to a possible surge in commodity prices, the government selected 52 basic necessities for which it will monitor prices and implement limited measures to control prices.
Monitoring and influencing prices is only a temporary measure to calm worries over inflation. Commodity prices increase because there are legitimate causes such as an increase in raw material costs.
So putting arbitrary limits on prices can’t be a good solution. For such measures to be effective, prices must be allowed to increase, at least gradually, to reflect the causes.
In the long term, prices that are meant to increase will do so. Therefore, it will be still unclear whether the 6 percent growth target can be achieved this year or next without excessive inflation.
Whether the government can achieve its goals this year or not depends on how much the U.S economic recession and the increase in raw materials affect the domestic economy.
As long as U.S. economic insecurity continues and raw material prices remain high, Korea can’t meet its economic targets on its own.
If we excessively pursue the goals when the external climate is hostile, we will more likely fail to both stabilize commodity prices and meet the growth target.
If the government tries to achieve the goals without considering outside factors, it will be forced to adopt unreasonable policies and have trouble justifying its decisions. If the government regulates prices at a time it is promising to lift regulations on companies, companies will be perplexed.
If the government lowers taxes, saying that lower taxes will reduce manufacturing costs, commodity prices will increase instead.
Some maintain that a cut in the interest rate would help companies do business and thus stabilize commodity prices.
The right way to meet both goals is to increase productivity. While the government continues to implement its major polices, such as deregulation, tax cuts and smaller government, productivity must be increased.
The problem is that it will take a long time for companies and workers to boost productivity, and workers’ productivity is reflected in their salaries.
However, when the economic environment is as hostile as it is now, the government must faithfully pursue policies designed to make this year the first year of advancement, no matter how hard it may be, instead of being obsessed with the growth target of 7 percent.
In order to achieve 7 percent growth, we must strengthen our bodies and improve our physical condition, instead of just consuming more food.

*The writer is a professor of economics at Hongik University. Translation by the JoongAng Daily staff.

by Park Won-am
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