[Song Seungseop's Financial Light] The Central Bank's Eternal Nemesis, 'Inflation'

Demand-Pulled vs Cost-Pushed Inflation
Screwflation Squeezing Middle-Class Lives
Core and Expected Inflation by Measurement Method
Agg, Eco, and Greenflation Emerging Amid Climate Crisis

Inflationary pressures that swept across the globe last year are gradually easing. In South Korea, the consumer price inflation rate, which hovered above 6%, has decreased for four consecutive months this year, falling to the low 3% range for the first time in a year and a half. Central banks, whose goal is to manage inflation, and governments troubled by high prices can finally breathe a sigh of relief. However, not all inflation is the same. Economists categorize inflation into different types and new terms emerge depending on economic phenomena. There are over a dozen inflation-related terms frequently appearing in media reports. Here, we explain these easily confusing inflation terms in simple language.

Demand-Pull vs Cost-Push... Why Do Prices Rise?

In economics, inflation is broadly classified into two types based on its causes: 'demand-pull' inflation and 'cost-push' inflation. Prices are determined by total demand and total supply. Traditionally, economists believed inflation occurs when total demand increases. For example, the more people buy luxury handbags, the higher their prices rise. When governments print excessive money or companies increase investments, total demand rises, causing prices to increase?this is called demand-pull inflation. Therefore, people generally believed inflation occurs during economic booms when consumption and investment are active.

However, something unusual happened in the 1970s. Despite a sluggish global economy, prices rose. The oil shock caused oil prices to soar, and companies faced higher production costs, leading them to raise prices. This type of inflation, caused by a decrease in total supply while total demand remains unchanged, is called cost-push inflation. For example, if the number of people wanting luxury handbags stays the same but the supply decreases, prices naturally rise. Ian Macleod, a British Conservative politician and the Treasury Secretary in 1970, combined the term stagnation (meaning economic stagnation) with inflation to coin the term 'stagflation' to describe cost-push inflation.

Middle-Class Squeezed While Prices Rise

Inflation can also be classified based on economic conditions. Inflation occurring when the middle class’s disposable income decreases, though the economy is not in a full recession, is called 'Screwflation.' The term 'screw' means to squeeze, referring to a situation where the middle class’s livelihood is severely squeezed while prices continue to rise. Unlike stagflation, screwflation does not significantly impact high-income groups but hits the middle class hard, making it a major cause of widening income inequality. Some say screwflation is even harder to resolve than stagflation.

Inflation occurring when the economy is growing but at a gradually slowing pace is called 'Slowflation.' This happened during the sharp rise in raw material prices in 2005, 2007-2008, and 2010-2011. Slowflation is sometimes considered a precursor to stagflation. If slowflation is not resolved quickly, stagflation may follow.

Core Inflation and Expected Inflation

Inflation can also be classified based on measurement methods. The figure we commonly refer to as the inflation rate is actually the Consumer Price Index (CPI). If the CPI included costs like building factories or prices of large machinery indiscriminately, most people would find it hard to relate to the inflation rate. Therefore, 458 frequently purchased items are selected for price surveys. Some are single items like rice or ramen, while others cover multiple products like frozen foods or sports equipment. Items more important to consumers are given higher weights in calculating inflation.

But can we accurately understand inflation by measuring only consumer prices? The CPI includes items like vegetables and fruits, whose prices can spike due to typhoons or droughts. Oil prices also fluctuate wildly depending on producing countries’ policies. Relying solely on the CPI makes it difficult to grasp the long-term inflation trend.

Therefore, Statistics Korea measures 'core inflation,' which excludes price changes caused by temporary shocks. It reflects the long-term inflation rate determined by fundamental economic conditions. If consumer prices rise but core inflation remains steady, one might conclude that prices are rising due to temporary factors. In South Korea, this is published monthly under the name 'Consumer Price Index excluding agricultural products and petroleum.'

There is also an inflation figure surveyed and announced by the Bank of Korea called 'expected inflation.' Expected inflation indicates how economic agents predict future prices. In South Korea, it usually refers to the expected price level one year ahead. Since expected inflation is a forecast, it is determined through surveys of people rather than price surveys of goods. Accurately understanding expected inflation is very useful for medium- to long-term price management.

Wageflation, Agflation, Ecoflation, and Greenflation

If expected inflation is not properly addressed, it can lead to wageflation. Wageflation is a compound word combining 'wage' and 'inflation.' The higher the expected inflation, the more workers demand wage increases that match the inflation rate. When wages rise, production costs increase, leading to a vicious cycle of rising prices and wages known as the wage-price spiral. In June last year, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho told the Korea Employers Federation (KEF) that excessive wage increases exacerbate high inflation, reflecting this concern.

With growing interest in climate change due to global warming, inflation terms related to the environment have also emerged. Agflation, derived from 'agriculture' and 'inflation,' refers to the rise in general prices caused by increasing agricultural product prices. Ecoflation occurs when environmental factors such as heatwaves, droughts, or cold snaps increase production costs. Greenflation refers to rising raw material prices caused by regulations during the transition to a green economy.

Editor's NoteFinance is complicated. It involves confusing terms and complex backstories intertwined. Sometimes, understanding a single word requires learning dozens of concepts. Yet finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Therefore, Asia Economy selects one financial issue each week and explains it in very simple terms. Even those with no prior knowledge of finance can immediately understand these 'light' stories, illuminating the 'light' of finance.

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