Bank of Korea: "Corona-induced Digital Economy Transition, a Factor Lowering Inflation"

BOK 'Review of Inflation Target Management Status'

[Asia Economy Reporter Kim Eunbyeol] The spread of the novel coronavirus infection (COVID-19) has accelerated the transition to a digital economy, and digitalization is analyzed as a factor that lowers prices.

On the 17th, the Bank of Korea stated in the "Price Stability Target Operation Status Review" that "Korea has a very high level of digitalization compared to major countries in terms of the value added and employment share of digital-related industries (compared to all industries) and the digitalization index," and added, "Digitalization generally exerts downward pressure on prices."

It further added, "As the spread of COVID-19 is expected to further accelerate the transition to a digital economy, the downward pressure on prices will continue for the time being."

Digitalization directly acts as a factor lowering prices through the decline in prices of information and communication technology (ICT)-related goods and services. While Korea's GDP deflator rose by an average of 1.8% annually from 2001 to 2019, the deflator for the ICT industry (based on information and communication equipment manufacturing and information and communication services) fell by an average of 1.9% annually.

Indirectly, it acts as downward pressure on prices through intensified competition among companies due to increased price transparency and lowered entry barriers, as well as cost reductions from productivity improvements. The expansion of online transactions intensifies competition and makes price comparison easier, resulting in lower prices. The Bank of Korea also introduced an analysis that the expansion of online transactions lowered core inflation by about 0.2 percentage points annually from 2014 to 2017.

However, it advised that since changes in corporate pricing behavior, such as monopolization by large corporations and the spread of subscription-based services, are also observed during the acceleration process toward a digital economy, it is necessary to continuously analyze the impact of these changes on price dynamics. It suggests that the emergence of large companies like Amazon could actually reduce market competition.

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