Fighting the low-price, low-growth tendency

The comment from the deputy prime minister for the economy in late August - whether Korea has entered deflation or not - has become a hot topic. I personally think the question is unnecessary. By definition, “deflation” means a decrease in the general price level of goods and services, and the consumer price index, which is the standard of prices in Korea, shows an average price increase of 1.41 percent as of August 2014. Therefore, Korea is not in a state of deflation in a traditional sense.

What we need to keep in mind is that one of the notable trends seen not only in Korea but in many other countries is the low price. Neighboring Japan and many countries in Europe have had at most a 0.5 percent price increase since the second half of 2013 until now. The United States used an extreme measure of quantitative easing but hasn’t been able to attain the goal of a 2 percent price hike.

How did the low-price era arrive worldwide? If we look at the demand side only, the global trend of “aging” is considered a culprit. As the advancement of medicine has extended the average lifespan, people are now forced to prepare to live up to age 100, and the longevity inevitably results in frugality in order to plan for a longer life after retirement. Therefore, the price decrease as a result of a drop in demand is more evident in developed countries with longer life expectancy. Moreover, developed countries such as the United States, Japan and those in Europe use quantitative easing to deal with low price, but the policy leads to currency devaluation and exports deflation to the third countries in effect.

Deflation is alarming because it is self-destructive. But how should Korea deal with the situation? Before it’s too late, we need to use all short-term and long-term measures to fight the low-price, low-growth tendency. A low interest rate policy is a short-term prescription, and in the long run, we need to prepare for the aging of our society by reinforcing the social security system and addressing the low birthrate.

by Ha Tae-hyung President of the Hyundai Research Institute