Liquidity Overflowing but Only Asset Prices Rising... Inflation or Deflation This Year?

In 2020, No Spending on Consumer Goods but Asset Prices Rise Alone
Despite Unprecedented Government Money Printing, Inflation Remains Steady
Concerns Over Inflation Grow as Currency Value Declines

[Sejong=Asia Economy Reporter Kim Hyunjung] Amid the government's ongoing monetary easing measures to respond to the novel coronavirus disease (COVID-19) crisis, experts express concerns that both deflation and inflation may occur simultaneously this year. Due to factors such as restrictions on face-to-face contact and weakened consumer sentiment, the money injected into the market is not circulating, which could lead to deflation characterized by a long-term loss of economic vitality. At the same time, there is a sufficient possibility that inflation could emerge, where only asset values such as stocks and real estate rise while the currency value declines.

According to the "December 2020 and Annual Consumer Price Trends" released by Statistics Korea on December 31, last year's annual consumer price index was 105.42 (2015=100), marking only a 0.5% increase compared to the previous year, continuing the 0% range for two consecutive years following 0.4% in 2019. The annual consumer price increase rate hitting 0% has only occurred four times, including 1999 (0.8%) right after the foreign exchange crisis, 2015 (0.7%), and 2019 (0.4%).

The "Index excluding agricultural products and petroleum products (core inflation)" rose by only 0.7% compared to the previous year, recording the smallest increase in 21 years since 1999 (0.3%) after the foreign exchange crisis. Core inflation is calculated to understand long-term trends by excluding seasonal factors or temporary shocks affecting price fluctuations. The OECD-standard core inflation index, "Index excluding food and energy," rose by 0.4% compared to one year ago, which is also the lowest since 1999 (-0.2%).

Consumer sluggishness is also detected in the "November Industrial Activity Trends" released by Statistics Korea on the 30th, a day earlier. November consumption decreased by 0.9% compared to the previous month, continuing a two-month consecutive decline following -1.0% in the previous month. Compared to the same month last year, consumption fell by 1.5%, a larger decrease than October's (-0.1%).

Real estate stock photo / Photo by Mun Ho-nam munonam@

The direction of this year's economic trend largely depends on the spread of COVID-19. Experts believe that if the recent trend of daily confirmed cases fluctuating around 1,000 continues, it will be difficult to expect price increases driven by consumption recovery in early next year.

Professor Kang Sungjin of Korea University’s Department of Economics stated, "Despite the government injecting an unprecedented amount of money this year, low inflation continues," adding, "This means that although the government is pumping money into the economy, due to the contraction of the economy and consumption caused by COVID-19, the money is concentrated only in the stock markets and does not circulate in the domestic market." He further predicted, "The key to inflation will be the spread of COVID-19. If COVID-19 ends, consumption could explode, but if the current situation continues, the low inflation rate in the 0% range will inevitably persist."

However, considering the rising trend in stock and real estate market prices, some assessments suggest 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 things keep retreating," but "currently, asset prices are soaring on one side (stocks, real estate)." He added, "If there is no deflation in asset prices and only prices do not rise, it can be predicted that consumers have a gloomy outlook on the future," and "If deflation is expected to continue, asset price declines would also be predicted, causing hesitation in asset purchases, but that is not the case."

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 currency value falls, which means inflation." Professor Kim emphasized, "There are many talks that strong inflation will occur in the United States, and although it will be less severe, inflation is likely to occur in Korea as well. It is not due to demand-side factors."

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