[The Editors' Verdict] "Price Stabilization" The First Test for the Yoon Administration

These days, I can feel with my whole body the saying that everything is rising except for salaries. I thought life would get a bit better once the spread of COVID-19 subsided, but inflation has caught us off guard.

The year-on-year inflation rate rose from 3.6% in January and 3.7% in February to 4.1% in March, surpassing the 4% mark. In April, it increased further to 4.8%, and in May, it exceeded 5% at 5.4%. This is the highest inflation rate in nearly 14 years since the global financial crisis. The cumulative year-on-year inflation rate up to May is 4.3%. Unless inflation significantly slows down in the remaining months, it is a foregone conclusion that the annual inflation rate will exceed 4% this year. Moreover, many forecasts predict that the inflation rate will remain in the 5% range for the time being. Some even expect inflation to rise to the 6% range in June or July.

On the 5th, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, who is responsible for the economic control tower, personally visited large supermarkets to check prices of major items, which shows how serious the inflation situation is. Earlier, President Yoon Suk-yeol also declared at the end of last month that "price stabilization is the most important task" and ordered the mobilization of all available measures. On the morning of the 3rd, he indirectly expressed the looming crisis by saying, "Korea has entered the typhoon zone of economic crises."

High inflation is especially devastating for the lower-income class. The prices of items they mainly feel, such as petroleum products (34.8%), flour (26.0%), cooking oil (22.7%), and potatoes (32.1%), are much higher than the average inflation rate (5.3%). Electricity, gas, and water also showed a high increase of 9.6%. Raising the base interest rate to curb soaring prices only increases fears of stagflation (rising prices amid economic stagnation).

When the base interest rate rises, the burden of principal and interest repayments increases sharply due to higher loan interest rates. Those who have borrowed to the limit (Yeongkkeul) or invested with debt (Bittou), as well as self-employed people who survived the COVID-19 crisis through debt, inevitably face greater interest burdens. It will also be difficult for marginal companies with low credit ratings to secure operating funds. According to a Bank of Korea survey, if household loan interest rates rise by 1 percentage point, the annual interest burden increases by an average of 800,000 KRW per borrower. For companies, a 1 percentage point increase raises interest expenses by 8.69 trillion KRW. The number of marginal companies unable to pay interest with operating profits alone increases by 5.4 percentage points. Both households and companies becoming insolvent raises the risk of the national economy falling into a comprehensive crisis.

There is also a risk that our economy could fall into a long-term Japanese-style stagnation after inflation. Japan faced the "Lost Decade" in the early 1990s when its asset market bubble burst and has yet to escape the depths of recession.

Price stabilization can be considered the final task in overcoming the COVID-19 crisis. The astronomical fiscal spending injected by countries worldwide to rescue livelihoods affected by COVID-19 is the cause of rising prices. The government must do its utmost to stabilize prices by mobilizing all available means, including fiscal, tax, and financial measures. It must work in concert with the private sector to minimize factors that stimulate prices and carefully prepare support measures for the lower-income class. Now is not the time to be selective. It is no exaggeration to say that the success or failure of the Yoon administration depends on price stabilization. The government must learn from the previous administration’s economic failures and respond to the people's support.

Kwangho Lee, Head of Distribution Economy Department

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