Time to tackle inflation

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Time to tackle inflation

Grocery prices continue to climb, making the lives of ordinary citizens even more difficult amid the ongoing Covid-19 pandemic. According to Statistics Korea, the price of farm produce, livestock and fish jumped 9.7 percent on year in July. Eggs prices surged to a four-year high of 57 percent. A dozen eggs in a supermarket cost between a whopping 8,000 won ($7) to 9,000 won. The president had to order the government to interfere to tame egg prices. The Fair Trade Commission vowed a crackdown on price-fixing.

Staple food prices have surged. Prices of fruits, including apples and pears, were 60.7 percent and 52.9 percent higher, respectively, and produce such as garlic soared 45.9 percent and ground red chili 34.4 percent. Prices of meat also went increased and as a result dining costs and service charges also rose.

Lush liquidity is the fundamental reason behind the inflated prices. The government has handed out near 60 trillion won in Covid-19 relief grants, including the first universal handout last year at a budget of 14.3 trillion won. Another 10.4 trillion won will be unleashed to 88 percent of all households.

The deputy prime minister for the economy and agriculture, food and rural affairs minister have all scurried to wholesale markets after President Moon Jae-in ordered them to check market prices. Such an exhibitionist move won’t help anyone. Merchants will be more disturbed by the arrival of a senior government official. Tightening is the only move to absorb some of the excessive liquidity. In June, Bank of Korea (BOK) Governor Lee Ju-yeol raised the idea for the first time about a benchmark rate hike within the year. The verbal intervention was aimed to stabilize the market and dampen asset investment sentiment. But as the BOK stalls its move, liquidity and inflation have been piling up. Excess liquidity is also behind the surge in real estate prices.

Interest rates must go up before it’s too late. The U.S. Federal Reserve has warned it could enter tapering from October by scaling back its bond purchase program. Korea must not wait for a U.S. move for its cue on tightening action. Stimuli funds also must go to small merchants and the low-income class. Spending billions of dollars to give out $100 or $200 checks to citizens who do not need it will only fan inflation without helping the economy much. Timing is most important in taming inflation.
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