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Deflation should be on our radar

Published: 22 Nov. 2013, 08:15

One might laugh at concern over the risk of deflation, considering the spike in utility costs and rent prices. But data indicates signs of a slowdown in the inflation rate that could lead to deflation - where the general prices of goods and services show negative growth. In October, consumer prices edged up 0.7 percent year-on-year, the slowest pace in 14 years. The consumer price index hovered below 1 percent for the second consecutive month, which could put the annual rise at 1.1 percent or 1.2 percent. Last year, consumer prices rose 2.2 percent. It would be the second year the CPI stayed below the Bank of Korea’s annual inflation target of between 2.5 percent and 3.5 percent. Although it is still early to fret about deflation, the country is moving in the direction of deflating price levels.

Inflation in excess of the government’s target has long been a problem for our economy. However, overly deflated prices also can be dangerous. They could dampen corporate and consumer spending, which could lead to a recession. The deflationary spiral also would aggravate unemployment and the fiscal deficit because of reduced tax revenues.

In addition, wages would be frozen and disposable assets like real estate and stocks would lose value. Under depreciated price levels, families would have to struggle harder under enormous household debt of 1,000 trillion won ($941.25 billion). We have seen how Japan sank into a lengthy recession after years of deflation after its asset bubble burst.

There is no hurry for authorities to shift monetary policy to address disinflationary pressure. It would be too hasty to lower the benchmark interest rate or increase fiscal spending to artificially incite inflation. But we must closely study how other advanced economies cope with low prices and high unemployment. The European Central Bank surprisingly cut its key interest rate to a record low, and Janet Yellen, the nominee for Federal Reserve chairwoman, supported sustaining the stimulus bond-purchasing program to ward off deflationary risk.

We, too, must not indulge the danger. Overall, prices of goods and services are eroding due to the global economic slowdown. Import prices also have come down because of the strong won. The Korea Development Institute recently warned about a deflationary streak. We now have to deal with the danger of deflation along with the depressed economy.