[Viewpoint] A close look at inflation

Prices are on a tear, undaunted by the blunt attacks from economic and monetary authorities in their desperate battle against inflation. Prices of necessities, including fresh foods and meat, are hovering way above the 3-percent inflation target ahead of the nation’s biggest holiday, Lunar New Year’s.

It is strange how last year’s strong economic growth figures seem so remote from the lives of the common people, yet rises in consumer prices have exactly the opposite effect.

With Minister of Strategy and Finance Yoon Jeung-hyun worrying that inflation is eroding growth and with the president calling for a war on inflation, the government has tried to muster all possible help from government agencies, including the Fair Trade Commission and the National Tax Service, to rein in prices.

Yet the steps are neither creative nor effective. In fact, they are repeats of failed strategies from the past. The solution the government came up with is to freeze public utility prices and “contain” prices of indispensable commodities. The government calls these microeconomic measures to help ease price instability, but they actually come down to stopgap measures that merely interfere with free market principles.

Such a clampdown may have worked for authoritarian regimes, but not in today’s economic world. Yet the government has fielded the antitrust agency and tax office to act as arm-twisting Old Guards to keep prices under control.

Bureaucrats sitting in government offices are seasoned enough to know that those old ways don’t work. The fact that they go along shows how desperate they are to show they’re trying, particularly considering the dearth of other options.

Like many governments in emerging economies, ours is faced with uncontrollable inflationary pressures from a combination of an upsurge in prices of international raw materials and commodities and Chinese imports, on top of sharp price increases in domestic foods and livestock due to an unprecedented cold spell and the outbreak of foot-and-mouth disease.

A small economy like ours cannot be immune to surges in international raw material and agricultural prices. Rises in Chinese imports, which make up 17 percent of total inbound shipments, also take a toll on local prices. The government cannot do much about the extraordinary weather and spread of disease.

It can somehow try to ease the flow at the supply end in the longer run, but the government might as well give up hope of containing prices in the near future. Cost-triggered inflation usually loses steam in time.

What authorities should do instead is to turn their attention to the potential foaming of bubbles in assets because people expect an upward spiral in inflation. The immense flood of liquidity since the global financial crisis of 2008 is prowling about looking for ludicrous investment opportunities. If the capital starts to circulate, it could fuel out-of-proportion inflationary flames.

The Korean economy, which grew at a surprisingly robust pace of 6.1 percent last year, is expected to slow down sharply this year. The gap in rates of real growth in gross domestic product and potential growth is expected to remain in negative territory this year as well. In short, the economy is clearly safe from overheating. The property market remains stubbornly in the dumps. There are no signs of inflationary pressure on the demand end, and, therefore, efforts to water down demand will prove futile in an inflation fight.

Yet the Bank of Korea chose to lift the benchmark interest rate - the key instrument to cool off demand - earlier this month. Since the recent uptick in prices is caused by cost rises on the supply end, the rate hike is unlikely to help rein in runaway prices, but can stave off expectations for further inflation jumps.

Monetary tightening moves should be limited to curbing anticipation of further price rises as more aggressive action will only end up throwing icy water on the economic recovery and trigger insolvencies in consumer debt. The government and the central bank are in for a long period of maintaining a tricky balancing act on policies balancing growth and inflation.

The government cannot risk inflation to spur growth or sacrifice growth and jobs to contain inflation. The best they can do is to keep a light hand on monetary policy.

*The writer is an editorial writer of the JoongAng Ilbo.

By Kim Jong-soo