Let’s get serious about inflation

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Let’s get serious about inflation

Inflation has already hit a worrisome level, with the price of crude oil topping $90 a barrel and the price of sugar and flour skyrocketing. Prices of utilities in the metropolitan area also rose sharply.

With such drastic price hikes in mind, President Lee Myung-bak must certainly have stressed during a cabinet meeting to start the new year that the government must hold the inflation rate at 3 percent this year.

Both the Ministry of Strategy and Finance and the Fair Trade Commission now face the daunting challenge of tackling price hikes. The finance minister vowed to approach the issue with a “preemptive strike against price increases,” and the head of the trade commission said he will expand the commission’s role in stabilizing consumer prices.

President Lee has so far employed a strategy of treating symptoms as they appear. He created the so-called MB Price Index, while twisting the arms of manufacturers of daily necessities. However, such moves primarily created adverse effects and did not achieve their goals.

The current unstable prices are attributed more to external factors, such as commodity price hikes in the wake of the dollar devaluation from the U.S. government’s quantitative easing measures. On top of that, inflationary pressure from China caused by wage increases has contributed to the exacerbation of inflation here, combined with natural disasters from global warming. This inflationary pressure can hardly be curbed by price controls alone.

In general, the prescription for curbing inflation is relatively simple. All you need to do is raise interest rates, reduce the amount of money in circulation and hike taxes. However, when it comes to inflation stemming from an increase in costs - the type we see today - there is no panacea. If one tries to tackle the problem mindlessly, the entire economy will pay a high price.

To address the situation, the administration should fix the abnormally low benchmark rates and exchange rates. Only when it quenches inflationary pressure from imports by eliminating excess liquidity and gradually appreciating our currency can the government dampen inflationary pressure. The government should also persuade the public to join its pain-sharing efforts until international markets are stabilized. That’s the only way to wisely cope with this new type of threat. It is not a time to resort to low money rates, high exchange rates or compulsory price controls, as the government did in the past.
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