Core Inflation Rate Hits Lowest Since 2021... Only Grocery Prices Soared

Concerns Over Deflation Next Year if COVID-19 Crisis Continues
Strong Demand Rebound Expected if Vaccines and Other Measures Prove Effective
Some Predict "Asset Prices Rising and Currency Value Falling Could Actually Lead to Inflation"

[Sejong=Asia Economy Reporters Kim Hyunjung, Joo Sangdon, Jang Sehee] As the spread of the novel coronavirus infection (COVID-19) is expected to continue into next year, concerns about deflation (low prices amid economic recession) are emerging as consumer prices remain in the 0% range for the second consecutive year. However, looking at the trends of rising stock prices and real estate prices, there is still room for consumption and investment, and there are also forecasts that demand for personal services, which led the low prices, could strongly rebound once COVID-19 vaccinations begin.

According to the 'December and Annual Consumer Price Trends' announced by Statistics Korea on the 31st, this year's 'Index excluding agricultural products and petroleum products (core inflation)' rose by only 0.7% compared to the previous year, marking the smallest increase in 21 years since 1999 (0.3%) right after the foreign exchange crisis. Core inflation is calculated to understand long-term trends by excluding price fluctuations caused by seasonal factors or temporary shocks. The OECD standard core inflation index, the 'Index excluding food and energy,' rose 0.4% compared to one year ago. This is also the lowest figure since 1999 (-0.2%).

◆Only grocery prices rise... The common people's 'worries' = The biggest feature of this year's inflation is that prices of agricultural, livestock, and fishery products, the food ingredients in grocery baskets, soared significantly, limiting the decline in overall prices. The 'Fresh Food Index,' which is calculated based on 50 items such as fish, shellfish, vegetables, and fruits whose prices fluctuate greatly depending on weather conditions, jumped 9.0% compared to the previous year. This is the largest increase since 2010 (21.3%).

As grocery prices rise, ordinary people find it hard to feel the 'low inflation.' In fact, the 'Living Cost Index,' which is based on 141 frequently purchased items with a large expenditure share out of a total of 460 items to gauge perceived inflation, rose 0.4%, double last year's 0.2%.

Looking at trends by item type, the overall price increase of goods (0.9%) was also led by agricultural, livestock, and fishery products (6.7%), the highest since 2011 (9.2%). In particular, prices of napa cabbage (41.7%), onions (45.5%), mackerel (12.8%), and pork (10.7%) rose due to increased demand or reduced production. This change is even more pronounced compared to the price trends of overall services (0.3%) or industrial products (-0.7%).

[Image source=Yonhap News]

◆Deflation concerns rise... Strong rebound possible depending on COVID-19 trends = Whether the inflation rate will rebound next year largely depends on the spread of COVID-19. Experts say that if the recent trend of daily confirmed cases hovering around 1,000 continues, it will be difficult to expect price increases from consumption recovery in early next year.

Professor Kang Sungjin of Korea University’s Department of Economics said, "Despite the government injecting an unprecedented amount of money this year, low inflation continues," adding, "This means that due to COVID-19, the economy and consumption are contracted, so no matter how much money the government injects, it only flows into stock markets and does not circulate in the domestic market." He continued, "The key to inflation will be the spread of COVID-19," and predicted, "If COVID-19 ends, consumption could explode, but if the current situation continues, the low inflation in the 0% range will inevitably persist."

However, judging from the rising trends in stock and real estate markets, some diagnose that concerns about deflation are excessive. Professor Lee Inho of Seoul National University’s Department of Economics explained, "Deflation means there is no energy to buy any goods, and everything keeps retreating," but "currently, asset prices are soaring on one side (stocks, real estate)." Professor Kim Sangbong of Hansung University’s Department of Economics said, "Rather, supply-side inflation could occur next year," adding, "When a lot of money is injected and asset prices rise, the value of money falls, which means inflation."

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