Latest Publictions
2022 Oct/17
Determinants and Implications of Korea’s Inflation
Issue Papers 22-19
PDF
- Research Topic Macrofinance
- Page 30
- Summary
- Soaring inflation in major economies as well as in Korea has hit economic players hard. Global economic conditions such as supply chain disruptions and rising commodity prices are recognized as the main driver of the current inflation cycle, and demand recovery observed in each country is aggravating inflationary pressure. This article explores the determinants and characteristics of Korea’s inflation by comparing inflation factors between the US and Korea.
It has been found that commodity prices affect Korea’s inflation most and that the global supply chain crunch has the same critical influence as the won-dollar exchange rate. Notably, the pressure on the demand side has worsened inflation in the US, whereas it hardly has had any significant impact on prices in Korea. This can be attributable to Korea’s structurally sluggish domestic consumption. As of the second quarter of 2022, about 60% of price increases in Korea (consumer price index, on a QoQ basis) came from global factors such as the rise in commodity prices (40%) and the supply chain crisis (20%), while the proportion of demand pressure remained at a meager 1%. In addition, the won-dollar exchange rate made a considerable contribution, representing 11% of entire inflation factors.
As the main drivers of domestic inflation are global factors, Korea’s authorities face difficulties in implementing policies. The upward trend of expected inflation starting this year and the recent instability in the won-dollar exchange rate require monetary tightening. However, it is necessary to consider that demand-side pressure makes a marginal contribution to price hikes. Other policies need to be aligned with monetary policy. On top of that, recent history has shown that comprehensive energy policies including oil tax reduction are less effective in the medium to long term. Accordingly, policy responses to rising energy prices should focus on supporting low-income households.
The current uptrend in inflation could be eased on the back of tightening policies around the globe. But there is a possibility that higher commodity prices and supply chain disruptions would be entrenched as structural factors that can escalate global inflation uncertainties, due to the prolonged pandemic crisis, intensifying geopolitical conflicts and accelerated responses to climate change. Considering recent higher inflation, central banks’ effort to adjust the aggregate demand is of importance in inflation stabilization, which should be coupled with policy measures to tackle the intensifying and prolonged inflation uncertainty arising from structural factors.