Inflation is another type of tax

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Inflation is another type of tax

Published: 02 May. 2024, 19:37

Kim Chang-gyu
The author is the economic news editor of the JoongAng Ilbo.

During the 1509–1547 reign of King Henry VIII, England appeared to be falling apart. There had never been so many beggars, witnesses reported. The currency was being debased, further depressing morale. The feeling that something was not quite right was shared across Europe, which, by the 1590s, was consumed by financial crisis, social unrest and war. The Economist, in its December 2022 edition, looked back at inflation in the 16th century to draw lessons for global authorities struggling with an unprecedented inflationary run. It cited the unfamiliar monetary surge as the root cause of the chaos. In 1500, prices in England and other parts of Europe had stayed more or less the same for 300 years. Everything changed after that year. Prices in England doubled over 50 years, and those in Italy gained 5 percent annually. Inflation had hit 4 percent in France and Holland by the end of the century.

Inflation made European society and politics even more unstable. Socioeconomic and political damages were expansive and extensive. Causes were multifaceted. The population had grown fast after the Black Death, and many people moved to cities, leaving fewer farmers to meet the growth in food demand.

Monarchs began to manipulate currency by melting down gold coins to make more by mixing them with worthless metal to finance wars and palace luxuries. Then came the discovery of vast silver deposits in Bolivia. Thousands of tons of silver arrived in Europe via Spain, further fueling inflation. Everything in the country became expensive except for silver.

The curse of inflation lives on. Liquidity has never been so lush as it was in the aftermath of the pandemic, which was followed by wars in Ukraine and the Middle East that kept inflationary heat up due to unending supply disruptions. Food and grocery prices in Korea are rising at a dizzy pace. The consumer price index, which hit 5.1 percent in 2022, rose another 3.6 percent in 2023. After posting an on-year gain of 2.8 percent in January, the inflation rate bounced back to 3.1 percent in February and March. But fresh food prices show no sign of easing. The index of a basket of produce prices soared 14.4 percent on year in January, 20 percent in February and 19.5 percent in March. During that month, fruit prices jumped 40.9 percent. Poor crop from unseasonable climate conditions and lack of stock caused the price upset, the government explained. Consumers can only sigh and turn away from the fruit stand.

When the agony will end is uncertain. Producers raised prices after the election season. Those of chocolate, snacks and fast food like gimbap, or seaweed rice rolls, and hamburgers have gone up. Inflation is a common phenomenon, but the price gains in Korea are considerable in an international context.

According to the Organisation for Economic Cooperation and Development (OECD), prices of food and non-liquor beverage have soared 6.95 percent in Korea, surpassing the OECD average of 5.32 percent. They saw the third-fastest rise after the 71.12 percent jump in Turkiye and 7.52 percent leap in Iceland. The U.S. Federal Reserve is pushing back its rate-easing timetable due to the instability. The U.S. consumer price index rose 3.5 percent on year in March — outperforming both the 3.2 percent jump in February and the market consensus of 3.4 percent.

High prices tend to hit the weakest classes the hardest. Business Insider reported that the number of ALICE — Asset Limited, Income Constrained, Employed — people who are high enough above the poverty line to receive social benefits but aren’t able to get by is on track to make up 29 percent of the U.S. population. The ALICE proportion has increased over the past 10 years because the pace of wage growth could not catch up with the inflation of consumer prices and housing.

Korea has an ALICE population of its own. Real wages per worker, adjusted for inflation, fell 1.1 percent from the previous year to reach 3,554,000 won ($2,582) last year, extending the first-ever decline of 0.2 percent in 2022. Noble Prize winner and New York University economist Thomas Sargent regards inflation as a type of tax. Like a tax, it eats into income. The shock lands heavily on low-income people to whom every penny matters. If inflation is not defeated, suffering from the degradation of lives awaits us.