Inflation becomes main global economic worry

Inflation worries are rising steeply around the world and central banks are openly contemplating rates hikes.

The Bank of Korea (BOK) jacked up the base rate by 0.25 percentage points on Friday, putting it back to the pre-pandemic level of 1.25 percent.

The BOK said it expects consumer prices to rise at around 3 percent for a "considerable time."

Consumer prices in the United States saw their sharpest increase in four decades last month, according to the U.S. Department of Labor. The U.S. Consumer Price Index (CPI) rose 7 percent in December, the largest year-on-year increase since June 1982 (7.1 percent).

Analysts are estimating that this month’s inflation rate in the United States will exceed 7 percent as well.

U.S. consumer prices, which increased 1.4 percent in January 2021, rose 5 percent every month from May to September on an annual basis. That rate crossed the 6 percent mark in November, before exceeding 7 percent in December.

Prices of houses, cars and food drove inflation, reflecting international supply shortage and increases in labor cost following the pandemic.

Inflation anxiety is infecting the U.S. Fed.

“If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, then we will,” said Fed Chairman Jerome Powell during Senate confirmation hearing Jan. 11.

Bloomberg reported Jan. 12 that the Fed is expected “to begin hiking interest rates as soon as March.”

Interest rate hikes might happen more frequently than expected, according to analysts. Though the Fed hinted last month that the interest rate may increase three times this year, Goldman Sachs, JPMorgan Chase and Deutsche Bank are expecting four hikes.

“I actually now think we should maybe go to four hikes,” said James Bullard, Federal Reserve Bank of St. Louis President, in an interview with the Wall Street Journal.

The Bank of Korea raised the key interest rate twice last year. If the Fed raises rates four times, the U.S. key interest rate will climb to 1~1.25 percent from the current 0~0.25 percent, closing the gap with Korea's rate of 1.25 percent.

As inflationary pressure climbs, the BOK is on edge. According to a BOK report released Thursday, last year’s import price index rose 17.6 percent. The export price index climbed 14.3 percent in the same period.

Those are the largest increases since 2008 when the export price index rose 36.2 percent and the import index 21.8 percent.

Consumer prices rose 3.7 percent in December compared to the same period the previous year.

Abundant liquidity is a major cause of inflation and rate hikes.

On Friday, BOK Governor Lee Ju-yeol said, "A rate increase to 1.5 percent would still not be seen as a monetary tightening."

Korea is feeling the effects of global inflation, as the domestic misery index – a barometer of economic distress felt by people – reached a record high of 16.5 last year, surpassing the previous year’s record 14.0, according to a report by opposition People Power Party lawmaker Choo Kyung-ho.

The domestic misery index is calculated by adding the perceived unemployment rate and the inflation rate of daily necessities. The Hyundai Research Institute developed the domestic misery index by adjusting a misery index created by American economist Arthur Okun.

The price of daily necessities in Korea rose 3.2 percent in 2021, the sharpest surge since 2011's 4.4 percent.

As prices rose, the employment situation continued to languish.

Though the actual unemployment rate dropped to 3.7 percent last year, the lowest in four years, the perceived unemployment rate reached 13.3, the second-highest since 2015 when relevant statistics were first compiled.

“As price hikes are a global trend rather than the domestic one, it won’t be easy to rein in inflation for a while,” said Kang Sung-jin, an economics professor at Korea University.

BY HWANG EUI-YOUNG, KIM NAM-JUN [shin.hanee@joongang.co.kr]