33 Trillion Supplementary Budget Raises Prices

Consumer Prices Rise 2% for 3 Consecutive Months
Experts: "Demand-Side Inflation Pressure Rises with Economic Recovery... Also Watch Oil Price Increase"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] As the government prepares a second supplementary budget (추경) worth 33 trillion won, analyses suggest that large-scale fiscal projects will impact inflation. Since fiscal policy directly affects prices, the possibility of future inflation cannot be ruled out.

According to the 'June Consumer Price Trends' released by Statistics Korea on the 2nd, the Consumer Price Index stood at 107.39 (2015=100), marking a 2.4% increase compared to the same month last year. This is the first time since September-November 2018 that a 2% increase has been recorded for three consecutive months. With prices rising sharply this year, the consumer price increase rate for the second quarter (2.5%) was also the highest since the first quarter of 2012 (3.0%).

In June, prices rose mainly due to industrial products (2.7%), services (1.6%), and agricultural, livestock, and fishery products (10.4%). Although the increase in agricultural, livestock, and fishery products slowed compared to the previous month (12.1%), it maintained a double-digit growth rate for six consecutive months.

While it is expected that prices will stabilize as supply-side pressures ease, large-scale fiscal projects are forecasted to push prices upward. In fact, the supplementary budget’s cashback program alone is expected to raise prices by 0.03 percentage points.

Government: "Fiscal Spending Affects Prices Over 8 Quarters"... Blocking Inflation Concerns

Regarding this, Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki explained, "Private transfer payments used in supplementary budget projects have relatively low fiscal multipliers, so their impact on prices is quite limited," adding, "The transmission channels through which fiscal spending affects prices usually unfold over about two years, or eight quarters." He continued, "The impact on prices, especially inflation, in the second half of this year will not be significant," and added, "We will control this year’s inflation rate to stay below 2%."

Lee Eok-won, First Vice Minister of Economy and Finance, also stated, "In the second half, supply-side inflationary pressures such as the base effect are expected to ease somewhat, with fluctuations around 2%. However, upward risks such as weather conditions and rising international oil prices still exist, so we will strengthen proactive response efforts."

Experts: "Demand-Side Inflationary Pressure Rises with Economic Recovery... Oil Price Increase Also Noteworthy"

On the other hand, experts predict that the government’s supplementary budget projects will lead to demand-side inflationary pressures. They argue that such large-scale consumption stimulus measures are unnecessary, especially as private consumption is already naturally recovering.

Professor Kim Sang-bong of Hansung University’s Department of Economics also said, "Fiscal projects cause price increases faster than tax policies," adding, "Compared to monetary policy (interest rates), it takes time for money to circulate and translate into income, but fiscal policy will elicit market reactions in the short term." He further predicted, "There is a possibility of a sharp rise in prices in the third quarter," and added, "If herd immunity is achieved by November, prices could rise by at least 0.2 percentage points."

Professor Lee In-ho of Seoul National University’s Department of Economics forecasted, "The inflationary pressure will increase further with the 33 trillion won supplementary budget." He added, "If the global economy recovers and trade conditions improve, oil prices will rise, and this increase will contribute to overall inflationary pressure."

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