[Reporter’s Notebook] The Real Enemy of Prices Is Volatility... The Significance of the Price Ceiling

"What matters more than whether prices go up or down is the degree of volatility. When volatility increases, it ultimately means greater uncertainty for the economy."

This comment was made informally by a senior official from the Ministry of Economy and Finance. In response to complaints that prices are not coming down, he countered, "Once prices start falling rapidly, consumer spending grinds to a halt, and isn't that even more dangerous?" The stance of policymakers is clear: the government's idea of 'price stability' does not mean unconditionally dragging prices down. Rather, it means minimizing sharp rises and falls—that is, reducing volatility as much as possible.

At first glance, a drop in prices may seem welcome, as it relieves pressure on household budgets. However, the authorities are wary of the 'speed' of decline and the chain reactions that follow. When prices fall quickly, consumers postpone spending, expecting that prices will be even lower if they wait a bit longer. As household spending decreases, companies cut back on production and employment. This leads to a vicious cycle of deflation, where declining incomes and weaker demand reinforce each other. Conversely, if prices rise too rapidly, it is also problematic: real incomes fall, and companies halt investment due to soaring costs. Whether prices are rising or falling, if the pace is too steep, the engine of the economy cools down.

The government's philosophy of 'guarding against volatility' was most dramatically demonstrated in the recent introduction of the oil price ceiling. Due to the aftermath of the Middle East war, international crude prices fluctuated wildly. Dubai crude surged from $68.4 per barrel on February 27, before the outbreak of war, to $137.82 per barrel on March 19—soaring 101.5% in just three weeks. There is a precedent from the Russia-Ukraine war where international gasoline prices rose 17.3% and domestic prices rose by 15.3%. In the current Middle East conflict, although international prices soared by 73.9%, domestic price increases were held to 16.6%.

What would have happened if the government had left everything to the market? According to government estimates, consumer prices in March would have soared to 2.8% (+0.6 percentage points), and in April to 3.8% (+1.2 percentage points). Households' real purchasing power would have plummeted, and companies would have been thrown into panic by skyrocketing transportation and manufacturing costs.

The government's price ceiling and fuel tax cuts were powerful tools for market intervention. They slowed the speed at which the shock from soaring international oil prices was transmitted to domestic prices. The huge external shock was absorbed by policy buffers, easing the pace at which households and businesses felt the burden. Of course, there are limits. Upward pressure on prices due to base effects will persist for some time, and the longer the government artificially suppresses market prices, the greater the side effects. The government cannot indefinitely control major external variables such as oil prices or exchange rates.

Nevertheless, the message conveyed by the price ceiling is clear. The ultimate goal of policy is not the 'number on the price tag,' but the 'predictability' that economic players can prepare for. Delaying shocks and guiding a soft landing prevents the economy from falling into a vicious cycle. This is the true meaning of 'price stability' that the authorities aimed to protect—even going so far as to implement the extreme measure of a price ceiling.

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