[What Do You Think] The Judgment of Full-Scale Inflation Entry Is Excessive

Takryucheongron is a column featuring in-depth analysis and diagnosis by experts in the relevant fields on socially contentious topics. This week's topic is related to inflation.

Professor Kim Yong-ha, Department of IT Financial Management, Soonchunhyang University

Recently, there has been heated debate domestically and internationally about whether we have entered an inflation phase. From the supply side overseas, oil, raw materials, and grain prices are fluctuating. North Sea Brent crude oil, which had been below $50 per barrel, gradually rose in the fourth quarter of last year and is now threatening the $70 mark. Prices of raw materials such as nickel and copper peaked at the end of February but have slightly declined since, though they still maintain a high growth rate compared to the same period last year. As of March 1, international corn prices have risen 85.4% compared to April last year, soybeans by 72.2%, and wheat by 40% compared to June last year.

On the demand side, factors pressuring inflation include the US's $1.9 trillion economic stimulus package and expectations of a rapid economic recovery following the start of COVID-19 vaccinations. In South Korea, the consumer price index, which rose only 0.5% last year, increased by 1.1% year-on-year in February, but this was mainly due to a 16.2% rise in domestic agricultural and livestock product prices, suggesting that the impact of rising overseas raw material prices has not been fully transmitted.

Although there are scattered factors on both supply and demand sides that could trigger inflation, few experts believe these will persist long-term. For inflation to become widespread, core price pressures from the supply side must accelerate, or the economy must recover rapidly and enter an overheating phase. However, prices of oil and copper, which sparked inflation concerns, peaked at the end of February and have since declined somewhat, and although grain prices remain high, they are no longer soaring. Moreover, industries leading the current economic growth related to the Fourth Industrial Revolution generally do not require large energy consumption, so the possibility of inflation from cost pressures is not very high.

Janet Yellen, US Treasury Secretary, recently stated in an interview that “there is some inflation risk, but it will be temporary.” She noted that while the US economy is recovering and some signs of price increases are appearing, it is unlikely to lead to high inflation. For demand stimulation to translate into inflation, massive stimulus funds must be fully injected into the market, and the economy must recover sufficiently to pre-COVID levels and enter an overheating stage, triggering alarm signals. However, we are not at that stage yet. Some view the recent US interest rate hikes as reflecting inflation expectations, but this can ultimately act as a force to suppress inflationary pressures driven by aggregate demand.

In South Korea, from 2019 to 2020, real estate and monthly rent prices rose sharply, and the stock index set new records, creating a liquidity-driven market based on low interest rates. Recently, concerns about a bubble in the asset market, which has surged disconnected from the real economy, have been cautiously raised. The shift to a rising interest rate trend and increased exchange rate volatility have heightened financial market instability. At this point, it is more urgent to prepare for the risk of collapse of asset prices that surged over the past two years than to worry about inflation. While supply-demand imbalances in key items such as crude oil, raw materials, and grains should be closely monitored and addressed, interpreting partial price increases as a full-scale entry into an inflation phase is excessive.

Kim Yongha (Professor, Department of IT Financial Management, Soonchunhyang University)

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