By Yoon Ja-young





Concern over deflation is increasing after inflation fell to the lowest level in nine months. Economists warn that Korea's economy could suffer Japanese-style deflation, if the low level of inflation continues.

According to Statistics Korea, consumer prices rose by 1 percent in November from a year ago, marking the lowest growth in 9 months. This is far below the central bank's target of an increase between 2.5- and 3.5-percent.

The government attributes the low inflation to a good crop harvest and a fall in global oil prices. However, core inflation excluding agricultural and oil products also stood at a mere 1.6 percent.

The government expects the planned cigarette price hike to help pull up inflation. The governing and the main opposition parties agreed to raise cigarette prices by 2,000 won per pack as suggested by the government. It expects the hike to pull up inflation by 0.62 percentage points, but economists say that won't solve the sluggish economy, which is the main cause of the low inflation.

Consumers may welcome low inflation, but if it persists, the economy can fall into a vicious cycle of deflation, in which households cut consumption and businesses refrain from investment. Economists are showing concern that the current low inflation is mainly due to slow growth.

"The point here is what brought the low inflation rather than the low inflation itself. It was driven by sluggish demand," said Lee Geun-tae, an economist at LG Economic Research Institute.

The consumer sentiment index fell two points to 103 in November, marking its lowest level in 14 months. It is even lower than the 105 in May, the month right after the Sewol ferry disaster that claimed 295 confirmed deaths. The key rate cut by the central bank and the 41 trillion won stimulus package by the finance ministry are not succeeding in boosting consumer sentiment.

The economist said that if the low inflation continues and the economy fails to revitalize itself, deflation can follow. "Once you fall in deflation, it is extremely difficult to get back on the track. The economic activities based on inflation will be in chaos, and the monetary policies won't work. The government should take measures in advance."

While deflation risk has become a global concern, economists say that Korea has some additional factors that make Japanese style deflation more likely.

"Korea resembles Japan of 1990s in many regards, such as the aging of the population and decrease in work hours. The huge current account surplus which led to strong domestic currency and eventually to sluggish exports and the weakening consumer sentiment due to preparation against retirement are also what Japan already went through. Korea should be alert not to follow in the footsteps of Japan," said Lee.

Lim Hee-jung, a research fellow at Hyundai Research Institute, said the low inflation reflects the low growth. "If the low inflation is due to, for instance, technological innovation which pulled down the cost, there won't be anything to be concerned about. However, the current low inflation only shows that businesses can't fully reflect the cost in prices. They are concerned that they may see sales decline once they raise prices," he said.

He said that sluggish consumption and investment will drive the economy toward deflation. "The government should focus on boosting the economy as it is difficult to pull inflation," he said.