Deflation

Consumer prices decline for 1st time

Concerns about deflation — a decline in the general prices of goods and services — are growing fast, with consumer prices falling for the first time in the country’s history amid an economic slowdown.

Experts said the Korean economy is entering an initial phase of deflation, warning that it could follow in the footsteps of Japan, which has suffered a decades-long deflationary malaise, unless the government takes necessary measures to forestall it

According to data released by Statistics Korea, Tuesday, the Consumer Price Index stood at 104.81 in August, down 0.04 percent from 104.85 a year earlier.

This is the first time the consumer price growth rate has dropped below zero since 1965 when the statistics agency began compiling related data.

The decline came after the growth rate had stayed below the 1 percent threshold for eight consecutive months since January.

“Deflation has practically begun,” Sung Tae-yoon, an economist at Yonsei University, said.

“The average Korean people may feel that consumer prices have risen sharply as evidenced by food prices at restaurants, but many businesses are experiencing a fast-deteriorating business environment due to falling demand,” he added.

The second-quarter gross domestic product (GDP) deflator, unveiled Tuesday by the Bank of Korea (BOK), also decreased 0.7 percent from a year ago, the worst since the first quarter of 2006. The figures has been declining since the fourth quarter of 2018.

The GDP deflator, calculated by dividing nominal GDP by real GDP and then multiplying by 100, represents the extent of price level changes.

According to the BOK, the country’s GDP grew 1 percent in the second quarter from three months earlier, following a 0.4 percent contraction in the first quarter.

Experts say that a mixture of falling prices and sagging economic growth are spawning fears that the country is facing the growing risk of deflation.

Price declines may sound like a boon for consumers but they could dampen investment and consumption leading to a further slowdown.

Yun Chang-hyun, an economist at the University of Seoul, said the situation could become worse much faster than previously thought.

“The economy has been in decline over the past two years and the risks triggered by domestic woes — notably the anti-business policy directives of the current administration — are becoming more pronounced following external shocks such as the U.S.-China trade feud and the latest dispute between Korea and Japan,” he said.

Japan’s so-called lost decades should serve as a sobering reminder to Korea, Yun added.

“The most frightening aspect is that the country could experience a drop in both people’s income and asset value. This means that the country could see its economy tank as people earning lower incomes will consume less, and the property market along with many other financial markets will become stagnant. It will be a downward spiral,” he said.

Downplaying fears

However, both the government and the BOK played down the danger of deflation saying that falling prices are driven by a “one-off, supply side-driven base effect.” The central bank expects consumer prices will pick up in the first quarter of 2020.

In a statement Tuesday, the BOK said, “Deflation is defined by general, broad and continued decline of the price level of goods and services, but the sharp drop in the consumer price was induced from supply-side factors not demand-side ones.”

Earlier on Aug. 30, BOK Governor Lee Ju-yeol said, “The continued downward trend of petrochemical products as of late, coupled with the heat wave-induced agricultural produce and livestock price drops is expected to continue until the end of the year, when the base effect will largely subside. Then consumer prices will rise sharply in the over 1-percent range in early next year.” Many economists, however, say the BOK assessment is out-of-touch with the reality felt by businesses and consumers whose sentiment determines demand side pressure.

The fear of deflation was first floated by a private sector think tank in June.

In a report, the Hyundai Research Institute (HRI) said the Korean economy was showing signs of “quasi-deflation” due to low consumer prices and the ongoing economic slowdown.