Low Consumer Price Index
The inflation rate is kept well in check, rising less than 1.0% for three consecutive months for the first time in 14 years. A key rate cut can be expected with the situation as it is, but discussions are ongoing for the timing of the tapering of the Fed’s quantitative easing policy.
According to Statistics Korea data made available on December 2, the consumer price increased by 0.9% year-on-year in November, following 0.8% and 0.7% the previous two months. This is the first time since the third quarter of 1999 that the inflation rate rose less than 1.0% for three months in a row.
The stable inflation rate can be attributed to weather conditions and the foreign exchange rate. The favorable weather conditions and the appreciation of the won led to a decrease in the prices of imported agricultural goods and petroleum.
The problem is that the low prices are not entirely welcome news. Although it is true that the low inflation rate alleviates the burden on the general public, it could be a prelude to deflation and reduced economic vitality, too.
The government is denying the possibility of deflation though. “The recent low prices have been derived from the supply side, that is, the prices of agricultural products and oil, and thus it has little to do with deflation,” said the Ministry of Strategy and Finance.
Nevertheless, some economists are pointing out that now is the time to cut the key rate, because aggressive monetary policy is required to accelerate the pace of economic recovery, and the government is going to devote itself to economic revitalization next year.
The others’ consensus is that more prudence should be exercised in cutting the benchmark rate, as the current situation cannot be defined as deflation, and it is difficult to predict the direction of the tapering of the quantitative easing policy by the advanced economy of the US.