'Inflation vs Deflation' Debated Abroad... Why South Korea Remains a 'Calm Zone'

US May Announce Tapering Plans in H2 Next Year Due to Inflation
Domestic Sentiment Favors "Inducing Inflation" Amid Low Growth and Low Inflation Trends
Low Probability 'Tail Risk' but Caution Needed Due to Large Debt Size

[Asia Economy Reporter Kim Eunbyeol] After the novel coronavirus infection (COVID-19), will the money supply lead to a 'boomerang of inflation' that devalues currency, or will the economy head towards 'deflation,' where prices do not rise despite increased money supply, causing economic stagnation? As the COVID-19 pandemic crisis has continued for nearly a year, debates over inflation trends are heated overseas, but South Korea seems to be a calm zone in this debate. Since concerns about a long-term recession similar to Japan's 'Lost 20 Years' had been high due to entrenched low growth and low inflation trends even before COVID-19, the prevailing sentiment is rather that "it would be fortunate just to avoid deflation."

U.S. May Announce Tapering Plan in Second Half of Next Year Due to Inflation

On the 21st, the International Finance Center stated in its '2021 U.S. Monetary Policy Outlook' report, "If upward pressure on the economy becomes visible due to vaccine rollouts, expected inflation or interest rates may rise, making it difficult to maintain an accommodative policy stance," adding, "there is a possibility that exit strategy issues will be raised in the U.S. after the second half of next year." This means that even if the U.S. does not immediately raise the benchmark interest rate, rising inflation could become a burden, leading to a shift toward tapering (gradually reducing the scale of quantitative easing (QE)). Major investment banks (IBs) have predicted that the U.S. may announce tapering plans as early as June next year.

The British Economist also predicted the possibility of an inflation era. It pointed out that if prices rebound next year, it would initially be welcomed as a sign of economic recovery, but as prices rise while the economy remains in recession, central banks could face difficulties. BlackRock, the world's largest asset management company, advised reducing bond holdings and increasing stock holdings in investment portfolios because inflation could cause bond prices to fall (bond yields rise). Thus, overseas, discussions on inflation are ongoing even as lockdown measures are tightened due to the resurgence of COVID-19.

Domestic Atmosphere Favors "Rather Inducing Inflation" Due to Low Growth and Low Inflation Trends

However, the atmosphere in South Korea is different. On the 17th, Lee Ju-yeol, Governor of the Bank of Korea, said at a briefing on the Bank's price stability target operation, "Although liquidity has increased significantly, the possibility of it causing rapid inflationary pressure is not high." Lee In-ho, President of the Korean Economic Association, also stated, "There is much talk about asset price bubbles, but it seems still distant from a phenomenon where prices rise on average across the board." He added that he has never seen a professor advocating inflation domestically and agreed, saying, "So far, the focus seems to be on continuing expansionary monetary policy despite inflation."

The reason South Korea is a calm zone in the inflation debate is that its economy had already been in a low growth and low inflation trend before COVID-19. Even if COVID-19 subsides, explosive revenge consumption and subsequent inflation are unlikely, according to analyses. South Korea recorded a consumer price inflation rate of 0.4% last year. This year, the consumer price inflation rate is expected to remain in the mid-0% range, far below the Bank of Korea's target of 2.0%. Factors include the increase in online shopping enabling price comparisons, which lowers prices, and reduced inflationary pressure due to low birth rates and aging population.

Low Probability 'Tail Risk' but Caution Needed Due to Large Debt Scale

Thus, the inflation risk in South Korea is a low-probability 'tail risk,' but it should not be completely ignored in light of overseas warnings. Inflation devalues currency, eroding the wealth and consumption capacity of deposit holders, and leads to rising nominal interest rates, which can burst debt bubbles. This could be especially damaging for South Korea, where private debt levels are high.

The Economist said, "Inflation risk is considered a tail risk but cannot be ignored," adding, "COVID-19 was an unforeseen but fatal event, so the revival of inflation is no exception." Tail risk refers to the extreme ends (tails) of a normal distribution in statistics, representing events with low probability but potentially huge impact when they occur.

Professor Kim So-young of Seoul National University's Department of Economics explained that although some argue that the economy has already fallen into a low inflation trend that is hard to escape, this is not necessarily true. He said, "Some say inflation did not occur even after the financial crisis and that we have entered a complete low inflation trend, but that is not the case," adding, "Unlike the financial crisis, the COVID-19 crisis has maintained the system, so after it ends, inflationary pressure may arise, possibly increasing inflation by about 3-5%."

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