Tame inflation fast

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Tame inflation fast

When Ronald Reagan was president of the United States, he said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” In other words, excessive inflation is a fatal disease that destroys the entire society.

The Bank of Korea yesterday announced its economic growth forecast for the latter half of 2008. BOK forecast that the growth rate will slump to 3.9 percent for the next six months and inflation is seen to jump to 5.2 percent. It is apparent that the economy will worsen through the latter half of the year. The pain of “low growth-high prices” could hit immediately. When the economy nears a deadly condition, the government and monetary authorities should get back to basics. That is, clamp down on inflation.

Even at an estimated economic growth of 5.4 percent in the first half of the year, people have complained that their livelihoods are under threat. Even so, the government should wrestle with the temptation to boost the economy. Consumer price growth in June stood at 5.5 percent on-month ? the highest since the late 1990s, when the currency crisis erupted. The Bank of Korea voluntarily withdrew its upbeat outlook and forecast a higher chance that international oil prices will advance further in the latter half. Given the situation, however much the government concentrates on stabilizing prices, blocking inflationary pressure is not easy. As the current inflation is typically from high oil prices and production cost increases, coping with it is harder than ever.

Stabilizing consumer prices is necessary to ward off sentiment for further inflation. It causes a vicious circle of excessive rises in labor costs, pushing prices upward. The crippling inflation that swept through the world in the 1970s was such a case. As central banks made monetary policy decisions to prop up the economy to fight the oil shock, inflation could not be stopped, with disastrous consequences.

The International Monetary Fund has pointed to inflation as the top economic issue of the year. Some international research institutions warn that two thirds of the world’s population will experience over double-digit inflation in the second half.

If the government aims to catch the two rabbits of economic growth and consumer prices, it might be pushing its luck. Some countries whose consumer price growth has shot up to double digits face the depressing scenario of national bankruptcy and government upheaval.

Could that happen here?
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