[Open Forum] Rising Prices, Falling Currency Value

Prices are flashing warning signs. It is a phrase heard every year around Lunar New Year, but this year the seriousness of the situation appears different from previous years. Last year, the consumer price inflation rate reached 2.5%, the highest in 10 years since 2011, while food prices surged by as much as 6.2%. In January, the increase in dining-out prices hit 5.5%, the highest level in 13 years.

The fundamental cause is the decline in the value of money. Too much money has been released into the market, and as a result the value of currency has fallen accordingly. The Bank of Korea maintained interest rates at a record low until August 2021. The government repeatedly pushed supplementary budgets and, along with various COVID-related disaster relief payments, increased liquidity in the market. The high exchange rate caused by the weakening value of the Korean won has also been a major driver of rising import prices, creating a vicious cycle.

The excessive increase in the minimum wage has affected prices in many ways. The minimum wage, which the government has sharply raised over the past several years, has acted as a trigger for inflation. This is because a higher minimum wage stimulates demand while also increasing labor costs. Moreover, unlike market goods whose prices are determined by supply and demand, the minimum wage—now at 9,120 won—does not fall once it has risen. In this way, the minimum wage continues to rise in succession and push up prices, while the overall rate of wage growth still remains below the inflation rate. In other words, except for those earning the minimum wage, real wages—nominal wages divided by prices—continue to decline.

External factors are also putting pressure on inflation. Rising international oil prices and distribution and supply chain bottlenecks have combined to send prices soaring. International instability, including U.S.-Russia tensions, has driven global oil prices sharply higher, while prolonged disruptions in the global supply chain have made all kinds of raw materials exorbitantly expensive. Yet there is no sign of the Ukraine crisis ending, and supply chain bottlenecks are also forecast to continue throughout this year.

The government’s actions are puzzling. With prices skyrocketing, one would expect the government to be doing everything possible to contain inflation, yet it has once again announced a supplementary budget worth 14 trillion won, prompting deep concern. Even as the Bank of Korea raises the base rate and the government freezes public utility charges in an effort to curb inflation, the irony is that another supplementary budget has been announced. Not only has it become more difficult to achieve the goal of price stability, but some have even gone so far as to say that the current government is fighting against economics itself.

Now is the time for the monetary authorities to devise solutions to stabilize prices and the value of money. If the government’s populist money-printing, excessive minimum wage hikes, and economically misguided policies continue, it is difficult even to imagine what value 10,000 won will hold next year. Even now, the government must swiftly move to adjust its excessive supplementary budget plan and the scale of minimum wage increases, and raise interest rates so that prices consistent with supply and demand can be formed. Through such efforts, the value of currency—the value of money—can be stabilized.

Hojun Jeong, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대]높아져 가는 물가와 대비되는 화폐의 가치

Author: Ho-jun Jeong

Date: 2022-02-18

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=9&idx=24545