In June 2022, the rate of inflation in Korea touched 6.0% compared to a year ago. This is the highest rate of inflation in the country since the Korean Financial Crisis. In November 1998, the rate had reached 6.8%. “Prices” is the level of the overall price (expressed by averaging the prices of individual goods or services), and the constant rise in prices is called “inflation”. The number indicating how prices have changed compared with the past is called the price index, and people often use the Consumer Price Index (CPI), which is usually measured by examining the prices of 480 items used by consumers. Inflation rate, which is the rate of increase in the price index, can be measured as (price index of this year – price index of last year) / (price index of last year) * 100 (%).
The Bank of Korea (BOK) is implementing Inflation Targeting as a monetary policy to stabilize prices, and the set inflation rate of CPI, since 2019, has been 2%. This is because gentle inflation is a sign of a healthy economy as demand increases due to economic growth. When severe inflation occurs, as in 2022, to stabilize prices, the central bank of the country in question raises its base rate. Interest rate is the cost of borrowing money, and base rate is the standard for interest rate and is used when the central bank deals with commercial banks. Raising the base rate raises the interest rate as well as the deposit and loan rates of commercial banks, thus encouraging people to increase their deposits and discouraging them from taking out loans; this results in the money in the market decreasing and prices stabilizing. Until now, BOK had raised its base rate by 0.25% twice a year on average, but in 2022, it raised it by 0.5% (called big step) in one go in July. The Federal Reserve Board (FED, the central bank of the United States (U.S.)) raised its base rate by 0.5% (big step) in May 2022 and by 0.7% (called giant step) in June and July 2022.
What causes inflation? Both an increase in demand and a decrease in supply raise prices. Inflation caused by an increase in demand is called demand-pull inflation, and that caused by a decrease in total supply due to an increase in costs of commodity goods is called cost-push inflation. With Bank of Korea Governor Lee Chang-yong’s saying, it can be seen the inflation in 2022 has the characteristics of both. In terms of demand, governments of several countries pumped in a lot of money into the market to prepare for the COVID-19-triggered economic downturn; this has led to an increase in people’s consumption. In terms of supply, decreased supply in the manufacturing industry (e.g., automobile semiconductors) has not been able to keep up with the sudden increase in demand since the pandemic subsided. Also, international oil prices and grain prices have risen following Russia’s invasion of Ukraine, as exports from the two countries have dwindled since.
Generally, demand increases when the economy is good, and prices rise, and demand decreases when the economy is bad, and prices fall. However, stagflation—that is, prices rising despite a bad economy—has no sharp solution. Inflation in 2022 is like stagflation, and students should pay attention to it.
By Noh Hyun-jin, AG Reporter
noh0605@ajou.ac.kr
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