The Ministry of Economy and Finance Reintroduces 'Gwanchi Inflation'... A D?j? Vu of the 'MB Price Index' Failure 14 Years Ago

Limits to Controlling Private Sector Prices Amid Global Inflation
Ministry of Economy and Finance Considers Including 'Key Item Price Management Status' in Relevant Departments' Performance Evaluations
Concerns Over MB Price Index D?j? Vu... "Price Control Difficult Without Liquidity Withdrawal"

[Sejong=Asia Economy Reporters Haeyoung Kwon and Sunhee Son] The Ministry of Economy and Finance's decision to have relevant ministries manage prices not only for private export items such as academy fees, movie tickets, home appliances, and automobiles in response to soaring inflation has drawn criticism as excessive 'government-controlled economy.' There are many predictions that this will follow the footsteps of the failed 'MB Price Index' introduced during the Lee Myung-bak administration in 2008. In particular, the Ministry of Economy and Finance initially threatened to reflect the price management performance of the relevant ministries in the government performance evaluation but withdrew the plan after those ministries opposed it.

◆Raw material prices soar, yet car price hikes are being blocked＝ The issue with the ministries' price management items is that government control can seriously interfere with corporate management activities. With the rapid rise in raw material prices increasing the cost burden on Korean companies, if the government monitors prices under the pretext of price management, market logic could be ignored.

In the case of automobiles, which are included in the government's major price management items, the price surge is not unique to Korea. Prices have already risen worldwide. According to the Korea Automotive Technology Institute, due to a shortage of vehicle semiconductors and logistics disruptions causing delays in new car supply, prices of new and used cars in major countries have surged. The average price of used cars in the U.S. rose 29% year-on-year as of November 2021. In Europe, the average used car price in October increased 28.3% compared to the beginning of the year, and Japan saw an 11% rise over a similar period. This phenomenon is called 'carflation.'

Carflation is driven not only by increased demand for automobiles but also significantly by soaring raw material prices. Hot-rolled steel sheet prices in the U.S. Midwest reached $1,502 in November last year, up 149% from $603 in early 2020. During the same period, aluminum and magnesium prices rose 112% and 146%, respectively. An industry insider said, "This year, automobile prices are inevitably going up worldwide," adding, "With rising cost burdens and supply unable to meet demand, government price monitoring can be a burden for companies." Concerns have also been raised that Korean companies may face reverse discrimination compared to foreign companies.

The same applies to academy fees, another price management item. Attempts to limit academy fee increases amid rising rents and wages could increase the burden on both large academies and small-scale businesses. Courts have already ruled against controlling academy fees. Previously, the Seoul Administrative Court sided with academies in lawsuits against the Gangnam Education Support Office's decision to freeze tuition fees.

Ultimately, in a global environment of accelerating inflation, such anti-market temporary measures are unlikely to achieve price stabilization. According to the Organisation for Economic Co-operation and Development (OECD), the consumer price inflation rate among member countries was 5.8% in November last year, the highest in 25 years since May 1996. The 2021 consumer price inflation rate was also 2.5%, the highest in 10 years.

◆Ministry of Economy and Finance considered evaluating ministries on price management＝ In particular, the Ministry of Economy and Finance reportedly considered reflecting the price management status of major items in the government performance evaluation during the introduction of the 'price responsibility system for ministries.' Although the government performance evaluation is led by the Office for Government Policy Coordination, the Minister of Economy and Finance also participates as a government member, intending to include each ministry's price management report card as an evaluation indicator. A government official said, "Fortunately, other ministries strongly opposed it, so the plan to include it in the evaluation was dropped," but added, "It is contradictory for the Ministry of Economy and Finance to threaten to penalize other ministries if they fail to control prices while pushing for expanded fiscal spending such as supplementary budgets."

Inside and outside the government, there are growing concerns that the Ministry of Economy and Finance's push for the price responsibility system for ministries will be a d?j? vu of the failed MB Price Index from 14 years ago. From March 2008, when the MB Price Index covering 52 items including daily necessities was introduced, until August 2011, the Consumer Price Index rose 13%, but the MB Price Index rose nearly twice as much at 20%. Critics argue that this new price responsibility system will also fail to curb inflation and instead become a potential burden on Korean companies and the economy.

A Ministry of Economy and Finance official explained, "Price stabilization measures cannot be done by the Ministry of Economy and Finance alone and require cooperation from other ministries," adding, "The intention is for each ministry to prioritize price stabilization policies and closely monitor the situation." The official continued, "In a situation where prices are liberalized, the government cannot and should not block industry price increases," and said, "The government wants to explore whether there are areas where it can structurally prevent price increases by supporting cost burdens or promoting competition in distribution structures."

Professor Tae-yoon Sung of Yonsei University's Department of Economics said, "The main cause of current inflation is liquidity, and to stabilize prices, monetary authorities must inevitably tighten liquidity through interest rate hikes," adding, "The government's current approach to managing prices is unlikely to achieve long-term price stabilization."

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