Deflation fears

Do not turn blind eye to growing downside risks

South Korea has never experienced deflation — a decline in the general price level of goods and services. But now, concerns are growing that the country may grapple with deflation down the road because consumer prices chalked up a negative growth for the first time last month. Policymakers should pay attention to these concerns to avoid a potential downward price spiral.

According to data released Tuesday by Statistics Korea, the Consumer Price Index (CPI) decreased 0.04 percent in August from a year earlier. It is the first time the price growth rate has gone into negative territory since the statistics office began compiling related data in 1965.

The data was also noticeable as the inflation rate has stayed below the 1 percent mark for eight months in a row since January. Some economists expressed shock at the unprecedented phenomenon. They warned that the figure may signal the start of deflation although such fears are unlikely to become a reality anytime soon.

The Bank of Korea (BOK) and the Ministry of Economy and Finance downplayed the possibility of deflation. “Korea is not in a situation of deflation yet because low inflation is caused mainly by supply-side factors, not demand-side ones,” Vice Finance Minister Kim Yong-beom said. Central bank officials also put the blame on a temporary or seasonal price fall in petroleum products and agricultural goods.

No one should try to exaggerate the risks of deflation. But it is not right to turn a blind eye to growing downside risks. This explains why policymakers should not take too complacent an attitude toward the current economic situation. Some of them have continued to argue that the Korean economy stands little chance of a crisis of any kind as its fundamentals are strong. Yet they have to remember why the country plunged into the Asian financial crisis in 1997.

For this reason, President Moon Jae-in and his economic team should monitor the deteriorating economic conditions more closely and take pre-emptive action against looming risks. It is imperative for them to take a more flexible attitude to work out better policy options to put the slumping economy back on track. To that end, officials should change the administration’s policies that are seemingly based on rigid ideology.

The export-oriented Korean economy is faced with ever-worsening downside risks such as the U.S.-China trade war, uncertainties arising from Brexit, and the escalating trade dispute between Seoul and Tokyo. It is suffering from a prolonged downturn due to sluggish consumption, production and investment. Exports of Korean goods have been on a nine-month downward spiral.

In this context, it is hard to preclude the dangers of deflation or a recession. The Moon administration should pull out all the stops to regain economic vitality and boost the country’s growth potential. Of course, this is easier said than done. But ignoring any looming woes and doing nothing could bring about unpredictable consequences resembling Japan’s so-called lost decades when that country was hit by chronic deflation.