Deflation alarm bells start to sound

Korea is facing growing fears of deflation as worsening economic situations at home and abroad are shrinking demand and property markets appear to be falling into a long-term downward spiral, experts said.
They noted there will not be outright deflation anytime soon for Korea, but worried that stalling growth, weakened investment and slumping property prices could destabilize the domestic economy, calling for the government to take more aggressive action to avoid such possible predicaments.

Deflation refers to a situation where the inflation rate falls below zero. Economists generally believe that deflation benefits consumers, but it could be detrimental to people who owe money because their income shrinks while their debts do not. It is also bad for workers because it could signal economic weakness, pay cuts and layoffs.

“In the wake of the collapse of Lehman Brothers, many countries injected huge sums of money into the market. Much of that flowed into East Asia, which is in relatively good shape economically, and drove up inflationary pressure here,” said Byun Yang-gyu, a research fellow at the Korea Economic Research Institute.

“But the global situation is turning bad ... More time is needed to see whether deflation worries will prove to be well-founded.”

Deflation worries are intensifying, especially as the global economic recovery appears to be stalling in Europe, the United States and China.

Adding to the concerns, Korea’s consumer prices dropped 0.6 percent in June from May, the sharpest drop in two years. Production prices also fell 2.1 percent on-month, as the domestic economy showed it is not immune to slowing global growth.

Growth in consumer prices has been stabilizing in the 2-percent range lately but some experts worry that deflation is on the horizon given that investment and consumption remain in a slump. Last month, Korea’s consumer price index grew 3.3 percent from a year earlier, the slowest gain in 32 months.

Experts call for policymakers to take more active stimulus measures, including an additional rate cut, to prevent the economy from spiraling into a deflation trap. Yonhap