Fears grow over inflation in US, Europe after beginning of mass vaccination
Soaring won, delay in full vaccination more immediate concern for Korea
By Lee Kyung-min
Concerns about inflation are emerging on the back of hopes of an earlier-than-expected economic recovery sparked by the beginning last December of mass vaccinations against COVID-19 in some countries ― a dramatic turnaround from worries over deflation raised amid the economic meltdown brought on by the coronavirus pandemic.
Some say it is too early to worry about inflation at a time when business activities are still in the doldrums and consumer price levels remain low. However, others argue that governments and central banks should take preventive action as inflation could occur sooner than expected due to the toxic cocktail of an astronomical amount of liquidity in the market and the potential worldwide economic recovery
Inflation occurs when the prices of goods and services rise, an economic condition opposite to deflation defined by the decrease of those prices. The two are considered opposite sides of the same coin, and an indication of how an economy can quickly swing from one to the other.
At issue is whether the bullish run in the equity and property market will see a drastic downtrend if the pandemic-created liquidity overflow in the market tapers off rapidly, a highly troubling scenario that combines explosive consumption demand overwhelming slowed supply capabilities that will take time to recover to their pre-pandemic strength.
The key determinant in what some consider a premature debate will be the speed of recovery in the job market, since the revitalization of much-tightened consumption will not be able to materialize unless workers ― mostly those in advanced economies with high labor market flexibility ― regain a stable source of income.
Local experts say Korea has to worry more about disinflation, given full vaccination of the entire population will not be achievable until at least the end of the year.
Disinflation is a decrease in the rate of inflation ― a slowdown in the rate of increase of the general price level of goods and services in a country's gross domestic product over time.
The soaring Korean won is another factor limiting price rises, since the appreciating currency will lead to a drop in import item prices. One dollar currently trades for about 1,097 won.
Wall Street forecaster Jim Bianco said the U.S. was bracing for a 2021 inflation comeback, with his judgment encapsulated by the following quote.
"You and I and everybody else will have fewer things to buy with a dollar in a year than we do now, and that will crimp earnings. That will make mortgage rates go up. That will make borrowing costs go up," he said in an interview with CNBC Dec. 30, 2020 (local time).
Bianco expects inflation will run 0.5 percentage points above the U.S. Federal Reserve's target of 2 percent. "That doesn't sound like a lot, but that would still be about a 28-year high ― 2.5 percent core inflation ― and something that virtually no one has seen. We haven't seen inflation in a generation, so a lot of people forgot what it looked like."
Inflation remains subdued due to the struggling economy, according to Bianco. But what he claims to be a temporary situation will see a breakthrough, buoyed by consumer sentiment picking up on the back of additional stimuli, driven further by an improving job market.
"Once you get all of that into the pipeline, you could have a burst of economic activity that could produce higher inflation for the first time in a generation. That's the big worry I have for 2021."
He further warned that the impact would hurt stocks, saying if interest rates jump because of inflation, "Historically risk markets like the equity market don't take well to that."
The forecast followed comments from Bill Dudley, the former president of the Federal Reserve Bank of New York, who in a column for Bloomberg essentially said that given the reduced supply capacity resulting from the pandemic, rapid inflation may be inevitable if demand increases this year.
The December 2020 Survey of Consumer Expectations released by the Federal Reserve Bank of New York showed the median home price change expectation increased sharply to 3.6 percent in December from 3 percent in November. The measure has been on an upward trend since reaching a low of 0 percent in April, and is now at its highest level since July 2018.
The case for rising inflation is advanced in part by a combined $14 trillion in emergency funds injected by the U.S. Fed, the European Union (EU), China and Japan into their markets to weather the pandemic.
Korea has seen market liquidity spike, as illustrated by Bank of Korea (BOK) data released Dec. 15 that showed M2 reached 3,150.5 trillion won in October, up 34.7 trillion won, or 1.1 percent from the month before.
This was a 9.7 percent jump year-on-year, and the second sharpest month-on-month increase after May's 35.4 trillion won increase, since the central bank began compiling related statistics.
M1 is a measure of money supply alongside M2. M1 includes highly liquid financial instruments including cash, checkable deposits and traveler's checks, whereas M2 encompasses M1 plus assets with lower liquidity such as savings, certificates of deposit and money market funds.
"Korea needs to worry about disinflation rather than inflation right now," Seoul National University economist Kim So-young said.
In his view, uncertainties surrounding vaccination still remain high, compounded by daily new infections resurging over the past weeks although the number has declined over the past few days.
"Even after the vaccinations, the job market will not recover as fast, which means consumption will lag. It is a bit premature to worry about a recovery-driven rise in prices of goods and services when economic recovery largely remains elusive."
The continued appreciation of the Korean currency against the U.S. dollar will limit inflationary pressure, as a stronger won will mean lower import prices.
"A strong won usually means the price of goods falling. It remains to be seen how the liquidity expansion over the past year will lead to a price hike after vaccinations of the entire population is complete," he added.
Korea University professor of economics Kim Jin-ill, who worked at the U.S. Federal Reserve Board for 10 years, said inflation is something the monetary authorities seek to bolster. But it can develop into a major headache once it materializes.
"Inflation-related risks unfolding is not a baseline scenario, but is one that requires close monitoring. Tightening monetary policy will not be an immediate concern for the Bank of Korea for a considerable period of time," he added.
BOK Governor Lee Ju-yeol said the expected upward pressure in the prices of goods and services will not be great enough to raise inflation concerns, during a press conference Dec. 17, 2020.
Korea's consumer prices rose 0.5 percent in 2020, with the figure remaining below 1 percent for the second consecutive year.