A brewery raised the prices of its five beer brands by an average of 7.48 percent in December only to revert them to the previous prices in three days. In the same month, a food company announced a 7 percent increase in its tofu prices only to rescind it in the same day.
Given that the two companies were among many others that made unsuccessful attempts at price increases, it is easy to assume that a not-so-hidden hand was behind the price rollbacks. Indeed, the administration had repeatedly promised “to stabilize prices” ― a euphemism for suppressing price increases by threatening a tax audit or an inquiry into allegedly unfair trade practices.
The administration has good reason to keep prices under check, in particular those of daily necessities and utilities. A surge in prices will deal a blow to the ruling party ahead of the upcoming general elections.
It seems that the administration has so far been successful in putting prices under control. The February consumer price index was at 3.1 percent, a 14-month low. It was well below the annual average of 4.4 percent last year.
As it said at a ministerial conference on prices earlier this month, the administration is planning to continue to tighten the control of prices in the weeks ahead. Among the measures taken were keeping temporary tariff cuts for certain products that were in short supply and making it easier for patients to compare examination and treatment fees that are not covered by medical insurance.
But the administration’s fiat alone will not work indefinitely. No business will sell below cost or at an unwarrantedly thin profit margin unless it aims at driving its competitors out of the market or increasing its market share.
Moreover, inflationary pressure will start to rise again, as improving consumer and business sentiment is heralding stronger demand.
Business confidence has surged for the second quarter, as shown by the results of a recent survey conducted by the Korea Chamber of Commerce and Industry. The business survey index has risen from 77 for the previous quarter to 99 for the April-June period. The optimism is attributed to signs of recovery in the United States and growing stability in the eurozone.
Consumer confidence is gaining, too. Citing the results of a survey conducted earlier this month, the Bank of Korea says consumers optimistic about the nation’s economic outlook outnumber pessimists, albeit slightly.
Behind the upsurge in business and consumer confidence is the low benchmark rate the central bank has been maintaining. It kept the rate at 3.25 percent for the ninth consecutive month this month. The downside of the low rate is the risk of fueling price increases.
Indeed, the central bank forecasts the average rate for the next 12 months will be 3.9 percent, much higher than last month. Still, few expect the central bank will take any preemptive action against inflationary pressure resulting from the more vigorous business activities and greater consumer spending that are expected.
The bank’s governor virtually acknowledged that the key interest rate was unjustifiably low, when he previously said, “There is no change in the basic policy of normalizing the benchmark rate.” He was criticized for ignoring the central bank’s primary responsibility of keeping consumer prices stable when the consumer price index soared to 4.4 percent last year.
Nor does the administration have anyone but itself to blame if it is denounced for paying lip service to a fight against inflation. It has refused to use the effective policy tools that it holds in its possession, such as policy on foreign exchange rates. No less disappointing is the lack of consistency in the administration’s price policy.
For instance, it has been pressuring individual businesses, in particular those selling daily necessities, not to raise their prices, but it has also been pressuring the central bank not to raise its benchmark rate.
Now consumers will have to brace for a surge in prices, which it is feared will come with a vengeance after the parliamentary elections. Moreover, it will be increasingly difficult for the administration to exert its influence on businesses, as it is nearing the end of its five-year term in office.
