Inflating Deflation
It has been announced that the domestic consumer price index rose by 0.5 percent year-on-year last month. Concerns over deflation are on the rise, with the figure having remained below 1 percent for six months in a row. Statistics Korea explained that a rise in the prices of vegetable and livestock products led the slight increase.
The government said that the current situation does not correspond to deflation, though. “The core inflation rate is at around 2 percent and the expected inflation rate is being maintained at 2.5 percent as in April,” the Ministry of Strategy and Finance pointed out.
Still, experts mention that the concerns are not groundless, as the stagnation of consumption is continuing amid low inflation. According to them, deflation may be caused by cost and demand factors alike. The former include the ongoing drop in international oil prices and the stabilization of the prices of primary industry products, which are considered to be improved in the near future as explained by the government. However, the demand factors are likely to be persistent due to structural problems. High real estate costs, huge household debts, increasing service costs for education, dining expenses and the like are predicted to keep affecting domestic consumption. Last month, the housing rent deposit showed a 3.4 percent increase from a year ago while private education costs and food service costs rose by 2 percent to 3 percent each.
This affected the average propensity to consume. According to Statistics Korea’s data published last month, the propensity declined by 2.1 percentage points year on year and reached 72.3 percent in the first quarter of 2015, the lowest first-quarter figure since nationwide records began in 2003.
The government is expecting that the current situation will be addressed in the latter half. “The consumer price is predicted to head upward as we approach the second half,” the ministry added, continuing, “The international oil prices are on a gradual rise with the base effect disappearing and the real economy is predicted to show at least some improvement on the demand side.”