[Era of Hyperinflation] Food and Wages 'One Mountain After Another'... Concerns Over Prolonged Inflation

More Serious Than the High Inflation of 2008

On the 5th, citizens were shopping at a large supermarket in Seoul. Amid the recent severe inflation situation, with last month's consumer price inflation rate exceeding 5%, the sharp rise in international grain prices due to the Ukraine crisis and export restrictions by major grain-producing countries is being transmitted domestically. Additionally, with recent drought damage added, the cost of living is showing unstable patterns, especially centered on some agricultural and livestock products. Photo by Kim Hyun-min kimhyun81@

[Asia Economy reporters Seo So-jeong and Moon Je-won] Recent inflation is not just a problem unique to Korea. However, unlike the high inflation era experienced during energy crises such as the oil shock, the current situation has expanded into a food security crisis intertwined with variables like the climate crisis and war, showing unprecedented ultra-high inflation patterns. Another notable difference from the high inflation period during the Lee Myung-bak administration in 2008 is the emerging signs of a wage-price spiral, where wages push up prices. This means that the tsunami of rising prices hitting ordinary households is unlikely to subside in the short term.

◆ Grain prices ignited by war = According to the United Nations Food and Agriculture Organization (FAO) on the 7th, the global food price index stood at 158.5 in April this year, nearly 30% higher than a year ago (122.1). The FAO surveys international price trends for 24 items including wheat, corn, and rice and publishes the index monthly. The index hit a historic high of 159.3 in March and remained at a high level in April. The prolonged Russia-Ukraine war has caused food prices to soar, and major countries have even imposed food export bans, intensifying concerns about agflation. This is why the Bank of Korea, acting as an 'inflation fighter,' is paying close attention to global grain prices. Lee Chang-yong, Governor of the Bank of Korea, stated, "Once grain prices rise, they tend to remain high for a considerable time, and if grain prices stay elevated, the prices of various food-related items will also remain high for a significant period," adding, "We are closely monitoring these trends."

Unlike the similar high inflation pattern seen in 2008 during the Lee Myung-bak administration, the added variable of the Ukraine war makes it difficult to predict how long the grain price surge will last, which is a factor fueling inflation anxiety. Considering that April was the main sowing season for key grains in Ukraine, a major exporter of wheat and corn, some analyses suggest that production and cultivation areas have decreased by at least 30% due to the war.

Kim Woong, Director of the Bank of Korea's Research Department, pointed out, "Due to the Ukraine war and export restrictions by major producing countries, international food prices are likely to remain high for a considerable period. In Korea's case, with a high dependence on food imports except for rice, the rising prices of processed foods and dining out could continue for a long time, which may affect expected inflation through perceived price increases." He explained that the global food price index has risen by about 60% compared to pre-COVID-19 levels, and the increase is even greater when broken down by individual items like wheat and corn. Lee Jung-hyun, Manager at Statistics Korea, also said, "Although livestock product prices usually rise in May due to demand during Family Month, this year's surge is particularly pronounced," attributing it to "the sharp increase in feed prices caused by the Ukraine crisis."

On the 6th, trucks are parked at the Western Truck Terminal in Yangcheon-gu, Seoul, as the Cargo Solidarity Union announces an indefinite general strike starting tomorrow, demanding the abolition of the sunset clause on the truck safety freight rate system, its expansion, and an increase in transportation fees. Photo by Kang Jin-hyung aymsdream@

◆ Concerns over a wage-driven inflation spiral = Increasing pressure for wage hikes is becoming a trigger for rising prices. Amid ongoing high inflation driven by rising raw material costs due to global supply chain disruptions, the recent spread of labor shortages has heightened the possibility of a vicious cycle of 'wage increases → product price hikes → intensified inflation.' In 2008, although inflation was high, real wages declined due to economic slowdown, weakening the link between wages and prices. According to data analyzed by the Korea Labor Institute, the average monthly total wage of all workers in 2008 was 2.64 million won, up 3.4% from the previous year, showing a relatively low trend compared to other years. In particular, the real wage growth rate, adjusted for consumer price inflation, was -1.5%, indicating a decline.

In contrast, recent observations show accelerated wage increases in some industries, raising concerns that wage-driven inflation instability is worsening compared to 2008. According to the minutes of the April Monetary Policy Committee meeting recently released, one committee member said, "We cannot rule out the possibility that the pass-through effect between wages and prices through rising expected inflation has already begun." This points to the risk that the vicious cycle between wages and prices could pose a threat to the Korean economy in the future.

Wage increase pressure is further fueled by the recent intensification of labor shortages. According to employment and labor statistics, as of the end of last month, the number of vacant jobs was 220,817, an increase of 104,699 (90.1%) over the past two years. With many job openings but difficulty in finding employees, wage pressure is rising across sectors including manufacturing and services. The elevated minimum wage level is also cited as a factor contributing to inflation concerns. The minimum wage rose by 5.2% during the Lee Myung-bak administration but surged by 7.2% during the preceding Moon Jae-in administration.

Consequently, the government is also closely monitoring wage increase rates. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho recently met with leaders of six economic organizations and urged, "Competitive wage increases can trigger an inflationary vicious cycle," asking them to "absorb price increase factors as much as possible internally." Cho Dong-geun, Honorary Professor of Economics at Myongji University, said, "When wages rise, self-employed people and companies consider future burdens and raise product prices further. Right now, lowering inflation expectations is most important, and to achieve this, wage restraint and higher interest rates are necessary."

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