Prices Turn Negative for the First Time in 8 Months: "Not Deflation Yet"

Supply Factors Such as Falling Oil Prices

Increased Home Consumption Due to COVID-19 Shock

Shopping Basket Prices Actually Rise

[Sejong=Asia Economy Reporter Joo Sang-don] Due to the impact of the novel coronavirus infection (COVID-19), the service price inflation rate in May slowed to a level comparable to the recovery period after the International Monetary Fund (IMF) foreign exchange crisis. Along with this, as international oil prices fell and the expansion of free high school tuition overlapped, consumer prices recorded a negative rate for the first time in eight months, raising growing concerns about deflation (price decline amid economic recession).

According to the 'May Consumer Price Trends' announced by Statistics Korea on the 2nd, the service price index was 107.02, rising 0.1% compared to the same month last year. This is the same level as December 1999, when the increase was limited to 0.1%.

Despite the slowdown in the service price inflation rate and the overall consumer price decline (-0.3%), Statistics Korea drew a line by stating, "It is not deflation yet." Ahn Hyung-joon, Director of Economic Trend Statistics at Statistics Korea, emphasized, "The dictionary definition of deflation is when prices fall due to demand shortages as the economy worsens, and this continues for a certain period. However, this time, the price decline factors such as the drop in petroleum prices (-18.7%) are supply-side, not demand-side, and since it only lasted for one month in May, it is inappropriate to judge this as deflation."

The government viewed the cause of this price decline as supply-side factors such as falling oil prices and reduced high school tuition fees. On the same day, Kim Yong-beom, 1st Vice Minister of Strategy and Finance, chaired a macroeconomic and financial meeting at the Seoul Banking Hall and explained, "The consumer price turning negative last month was mainly due to the sharp drop in international oil prices caused by the spread of COVID-19, which significantly lowered petroleum product prices such as gasoline, reducing consumer prices by 0.8 percentage points. Additionally, under the policy of expanding free education and free meals, local governments' reductions in local public utility charges contributed to lowering consumer prices by about 0.3 percentage points."

Although overall prices fell, prices of livestock and aquatic products rose sharply, causing shopping basket prices to increase. The fresh food index, which reflects prices of 50 items with large price fluctuations depending on weather conditions or seasons, rose 3.4% compared to a year ago. In particular, due to the COVID-19 impact and increased 'home consumption' of food ingredients, livestock product prices rose 7.2%. Specifically, pork rose 12.2%, domestic beef 6.6%, and eggs 9.1%. Mackerel prices also increased by 16.4%.

The government viewed the trend of consumer prices as a key variable in "what kind of recovery our economy shows from the COVID-19 shock." Vice Minister Kim said, "Regarding economic recovery, even experts present various views ranging from a V-shaped rapid return to normal trajectory to an L-shaped permanent deviation, as well as Z-shaped, U-shaped, W-shaped, and Swoosh-shaped patterns, which are intermediate between V and U shapes. The government will spare no policy efforts to prevent a vicious cycle where vague concerns about price declines spread amid such uncertainties, delaying consumption and investment and leading to a slowdown in growth."

This content was produced with the assistance of AI translation services.