Stability can be overvalued
The economy is full of surprises and upsets that go against common sense and defy expectations. A policy intended to help can do harm and vice versa. It first looked like it would be helpful for the government to set ceilings on rents to protect working-class families and ease their housing budget. But the cap could end up reducing the number of rental units or even lead to tenants being kicked out onto the street. Tax rates are hiked on expectations of increased tax revenues, but at the end of the day, less may be collected.
Theoretically, stable consumer prices are a good thing. If prices are subdued, living expenses can be lessened. People will feel richer because real incomes will grow if their growth outpaces the rise in inflation. But it is a different story if consumer prices do not rise for a long time or even fall. Then stable prices turn dangerous, toxic, fatal. Lower prices are good news for consumers. But they are the opposite for manufacturers and suppliers. Even if companies do not incur losses, their revenues will shrink. Reduced revenues on the supply end can hurt the economy. If the economy suffers, so does consumer spending. If consumer spending is depressed, prices fall further. That is how the economy falls into a deflationary spiral.
Stable prices, therefore, are not always good.
Falling oil prices on the international markets would appear to be a boon for our economy, which relies entirely on imports for fuel. Softer oil prices will save energy costs and help households, as well as lower manufacturing costs for companies. That should help bolster spending, industrial activities and investment. In theory. The reality could be the opposite. Consumer spending remains sluggish and industrial activities and investments dwindle. Even taking into account the contribution from decreases in oil prices, both the local and global economies are expected to underperform against estimates made earlier this year. Both the local and global economy have failed to benefit from the windfall of cheap oil prices. They have aggravated existing weaknesses.
Korea’s consumer prices in January rose 0.8 percent over the same period last year. Inflation has been less than 1 percent two months in a row. Prices are too stable. In fact, prices have been hardly moving since last year. Prices fell four out of the last six months of 2014. Manufacturing prices have been falling for a longer period. That is why many have been sounding the alarm about deflation.
Late last year, the state-run Korea Development Institute (KDI) advised more aggressive monetary policy as a preemptive measure against deflation. In other words, it is saying that actions to artificially inflate prices are necessary. If Koreans can shake off their phobia of inflation, higher prices can be helpful. Choi Kyung-hwan, deputy prime minister for the economy, has been arguing for ways to revive the growth rate for the same reason. People feel the economy is worse off because prices are declining while recovery is slow.
The Bank of Korea, however, remains stubbornly committed to a stable price policy. The central bank issued a rare study on inflation on Jan. 30 to emphasize that the deflation that has haunted Japan and threatened Taiwan won’t likely descend on Korea. It was responding to the KDI warning over deflationary risks and its advice on a preemptive rate cut. The BOK argues that prices are low these days not because of a slump on the demand side, but on the supply end due to the fall in oil prices. The two differ because they see the factors behind low prices differently. The central bank is right if we merely take account of the fall in global oil prices. But that alone cannot explain why consumer prices have been hovering below the bank’s official inflation target of 2.5 percent and 3.5 percent for 10 months in a row. It also does not explain the bank’s three rate cuts last year.
Instead of wasting time arguing via reports, the government and central bank should sit down and exchange views and insights on the economy. If the economy is safe from the danger of deflation, the government should stop nagging the bank for additional rate cuts. If there is a potential risk, the central bank should do its duty and join the fight against deflation. First of all, monetary policymakers should reject the dogma that stable prices are always good.
JoongAng Ilbo, Feb. 4, Page 32
*The author is an editorial writer of the JoongAng Ilbo.
by Kim Jong-soo
with the Korea JoongAng Daily
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