Inflation trumps growth policy

Inflation has taken a serious turn. Consumer prices in February rose 4.5 percent from the same period a year ago, exceeding the Bank of Korea’s 4 percent target for two months in a row. The political unrest in the Middle East has fueled an oil price increase in the international market, and the foot-and-mouth disease and cold weather in Korea have aggravated the situation.

The price of grain in the international commodity market is also on an upward spiral because of climate change and rapid growth in demand from China and India. If the trend continues, it will put strong pressure on consumer prices in March.

It is hard for the government to hammer out effective policies to deal with inflation caused by external factors. Finance Minister Yoon Jeung-hyun said it is getting increasingly difficult to fight inflation with policy means. Under the circumstances, an attempt to chase two rabbits - growth and price increase - at once will most likely invite a bigger disaster. The government should first change its goal this year of 5 percent growth and 3 percent inflation. Its pressure on big companies to cut prices can no longer work. A fundamental prescription - an adjustment of interest rates and exchange rates - is needed.

The government should concentrate on curbing the price hikes rather than compulsively notching up the growth rate. A government’s decision to quickly shift its policy focus from growth to stability will inevitably cause much pain in the economy because an interest rate hike will slow economic growth while aggravating the household debt burden. The measure will not only have a negative effect on the property market but will also impact exporters because of the inevitable rise in the won’s value. Yet the government can hardly find an alternative other than consolidating the basis for stable growth until external inflation causes fizzle out. Promoting stability is not an easy job. With the exception of the Chun Doo Hwan administration in the 1980s, none has succeeded in the effort. The goal can only be attained when backed up by strong political leadership and independent policymakers. The current economic team, however, mostly consists of Keynesianism worshippers who overly cherish growth over stability. The weapons to cope with economic depression are different, however, from the ones to fight inflation. We are wondering if those with the same economic orientation can deftly use a different set of policy measures. We should be prepared to go back to the stable growth track in the face of a huge inflation tsunami.