Consumer prices in South Korea last year grew at a slower pace than in Japan and other developments markets, international data showed Thursday, bolstering the argument by economy observers that the country is heading toward a deflationary spiral.
Data by the Organization for Economic Cooperation and Development showed South Korea's consumer prices rising 1.3 percent on-year last year, below the 2.7 percent growth in Japan.
South Korea's figure was 0.3 percentage point lower than the average for the Group of Seven major advanced economies and below the OECD average, which hit 1.7 percent last year, the data showed.
The last time South Korea's inflation numbers trailed those of Japan was in 1973 during the global oil crisis. In that year, Japan's inflation numbers shot up 11.6 percent, mainly due to its greater reliance on imported crude, while in less industrialized South Korea, consumer prices advanced 3.2 percent.
OECD data revealed that the weak Japanese yen resulted in the country paying more for energy resources in 2014 that influenced inflation numbers. In contrast, the Korean won's relative strengthening against the U.S. dollar made crude oil and agricultural products less expensive.
While these factors, plus the shock from the deadly Sewol ferry sinking sapping spending for months last year, apparently brought down the numbers, the comparison results with Japan, which is a more mature economy with much larger numbers of senior citizens who tend not to spend and save money, is troubling, observers say.
Policymakers often cite Japan's "lost two decades" as a lesson in trying to steer away from deflation.
"Since South Korea's consumer price numbers are decreasing even more rapidly than Japan's, there is a chance that deflation conditions may materialize in the country as well," said Oh Jung-gun, a professor of financial IT at Konkuk University.
He noted how Japan's inflation growth stood in the 1 percent range in 1992 and 1993 before falling near zero percent in 1994, and then heading into negative territory the following year.
Sung Tae-yoon, an economics professor at Yonsei University, argued the country was already in deflation and that this condition may go on for some time.
"Weak consumer price growth has already affected the overall economy," he said, urging the Bank of Korea to further lower the key interest rate. The policy rate was cut twice in 2014 and currently stands at a record low of 2 percent.
Samsung Securities Co. and Credit Suisse had predicted zero percent level inflation growth in the first two month of this year and that it may continue for the rest of the year. In January and February, Statistics Korea said the country's consumer prices rose
0.8 percent and 0.5 percent, respectively. The 0.5 percent gain is the lowest reported since July 1999.
Lee Bu-hyung, a senior fellow at the Hyundai Research Institute, countered that while deflation worries are real to some extent, the country was not falling into minus spending growth.
"The low price tendency has much to do with the large drop in oil prices, affecting the supply side of energy that accounts for 60 percent of South Korea's imports," he said.
"But it is true that concerns are growing as the trends of the South Korean economy appear to be getting closer to deflation."
Finance Minister Choi Kyung-hwan stirred up the debate Wednesday when he admitted "mounting concerns" about deflation.
His ministry on Thursday reiterated that South Korean was not in deflation, using as proof that core inflation, which excludes volatile prices, such as oil and food, rose 2.4 and 2.3 percent in the last two months.
"The government concedes there is a weak demand element, but the main reason for the current problem stems from the supply side brought on by weak crude prices," a ranking official claimed.
"Despite some confusion, Choi made very clear that South Korea was not suffering from deflation," the official said.
The finance ministry added that while some economic data for January and February were not too promising, it expects things to improve in the future.
There should be positive changes once measures to raise wages of government workers take bite, along with plans to increase household earnings, promote business investment and deal with unnecessary administrative red tape, the ministry said. (Yonhap)
