Governor Lee Ju-yeol: "Inflation Rise Prolonged Beyond Expectations... 2% Range Expected Next Year"

Bank of Korea Governor Lee Ju-yeol is speaking at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul on the morning of the 25th. 2021.11.25 Photo by Yonhap News

[Sejong=Asia Economy Reporter Son Seon-hee] Lee Ju-yeol, Governor of the Bank of Korea, said on the 16th, "A prominent feature of recent domestic and international price trends is that the factors causing inflation are increasing and their impact is gradually spreading, resulting in a longer-than-expected duration of rising prices."

At a press briefing related to the 'Price Stability Target Operation Status Review Report' held that day, Governor Lee said, "Major central banks, including the U.S. Federal Reserve, and many economic experts acknowledge that it is difficult to view inflation as a temporary phenomenon anymore."

This year’s annual consumer price inflation rate is expected to record a 2% range for the first time in nine years since 2012. The cumulative rate until last month stands at 2.3%. Regarding this, Governor Lee said, "Next year, the impact of supply-side factors such as international oil prices is expected to decrease compared to this year, but as the economic recovery continues, demand-side inflationary pressures are expected to expand further." He added, "Although the consumer price inflation rate is expected to be somewhat lower than this year, it will remain above the target level for a considerable period, showing a 2% range again next year following this year, and the core inflation rate is projected to rise to a level close to 2%."

The main cause of this price increase is the rise in energy prices such as international oil prices. Governor Lee said, "Initially, the rise in energy prices was widely seen as a temporary phenomenon due to supply-demand imbalances, but recently, unexpected shocks such as conflicts among major countries and abnormal weather have been added, making it difficult to rule out the possibility of prolonged high energy prices."

He also said, "Supply chain bottlenecks were initially limited to some intermediate goods and durable goods such as semiconductors for automobiles, but have since spread to the entire production stage including raw materials and logistics, lasting longer than expected." He added, "Concerns are growing that the recovery of supply chains may be further delayed due to the emergence of variant viruses such as Omicron."

Ultimately, supply-side factors are prolonging more than expected, and with demand pressures added during the economic recovery phase next year, the upward trend in prices is expected to continue.

Governor Lee expressed concern, saying, "The range of items showing a high price increase rate exceeding 2% has expanded widely from some items such as energy and agricultural and livestock products to many items including durable goods, personal services, and housing costs recently." He added, "Reflecting this, the underlying inflation trend excluding temporary or unusual factors is also rising."

He also said, "General public inflation expectations are also rising," adding, "If inflation expectations become unstable, as seen in other countries, there is a possibility that price increases could accelerate through the interaction of wages and prices."

Structural changes are also being detected in the industrial sector due to these inflation effects. Governor Lee said, "For example, companies are prioritizing securing stable supply chains over cost reduction, leading to reshoring and movements to reorganize the global value chain (GVC)." He analyzed, "There are signs of management strategies shifting from the existing 'just-in-time' method, which minimizes inventory in production and distribution management, to a 'just-in-case' method that prepares for contingencies, emphasizing resilience over efficiency. Ultimately, these changes may increase corporate production costs and act as structural inflationary factors."

He added, "The transition to a low-carbon and eco-friendly economy can cause raw material price increases and supply-demand imbalances of fossil fuels, acting as long-term inflationary pressures."

He concluded, "If high inflation persists, it not only reduces households’ real purchasing power but can also act as an obstacle to sustainable economic growth. The Bank of Korea, which aims for price stability, is carefully monitoring the recent price situation."

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