The Bank of Korea: "Economic Normalization... Demand-Side Inflationary Pressure May Expand More Than Expected"

Bank of Korea, BOK Issue Note
Theoretical Background of Recent Inflation Debates and Assessment of Realization Possibility in Our Economy

[Asia Economy Reporter Kim Eunbyeol] As the economy recovers from the economic shock caused by COVID-19 and economic activities normalize, the Bank of Korea analyzed that inflationary pressures driven by demand-side factors may expand more than expected.

On the 19th, the Bank of Korea stated in its 'BOK Issue Note' that "Based on the U.S. inflation debate, after examining inflationary pressures within our economy from the perspectives of money supply, demand, and expected inflation, it is assessed that inflationary pressures due to demand-side factors during the normalization of economic activities in Korea may expand more than expected."

In particular, the Bank of Korea evaluated that inflationary pressures from supply-side factors such as rising raw material prices and soaring maritime freight rates are expanding, while expected inflation is also facing upward pressure.

From a medium-term perspective, the Bank of Korea conveyed that there are quite a few factors potentially causing inflation. The Bank of Korea said, "Amid ongoing uncertainties regarding future economic conditions, concerns over the sharp rise in raw material prices are increasing, which could stimulate expected inflation and act as inflationary pressure. Furthermore, due to the characteristics of our economy as a small open economy, there remains a possibility that global inflationary pressures caused by fiscal stimulus measures in countries such as the United States could be transmitted domestically," it added.

Unlike past crisis cases, despite the expansion of the negative domestic gross domestic product (GDP) gap, the money supply has increased significantly, which could contribute to rising inflation if the GDP gap narrows faster than expected due to future economic recovery.

The Bank of Korea stated, "Considering these changes in economic conditions, it is necessary to pay attention to inflationary pressures from liquidity and expected inflation going forward," adding, "It will become increasingly important to prevent excessive liquidity expansion at a level that does not hinder economic recovery and to manage expected inflation so that upward risks from overseas and supply factors do not translate into self-fulfilling expectations."

It also said, "In the medium to long term, as the global supply chain, which has supplied low-cost goods through low wages including China, is reorganized during the pandemic recovery process, significant changes in price conditions are expected," adding, "Accordingly, there is also a possibility that inflationary pressures will gradually increase compared to the past." Therefore, it emphasized that systematic research on the structural impact of demographic changes and global condition changes on long-term inflation should be conducted in the medium to long term.

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