[Viewpoint] Inflation Fears? An Opportunity to Select Quality Stocks in the Market

Seojun Sik, Professor of Economics at Soongsil University

The prices of investment assets are falling sharply. This is a typical market condition during a monetary policy transition period, with both domestic and international stock and bond markets showing weakness simultaneously. The media continuously highlight the situation in the United States as the "highest inflation rate in 40 years," making inflation fears a central topic. This creates a troubling atmosphere where it seems that both inflation and interest rate hikes will persist for a long time.

However, concerns about the current inflation are excessive. Since the early 20th century, after the Second Industrial Revolution and the advent of mass production in capitalist societies, the classical economists' concept of inflation has become theoretical. Even if there is a lot of money circulating in the market, it is unlikely that prices will rise significantly because consumption does not exceed the supply of goods. On the contrary, due to scientific advancements, we should worry whether there is enough money to consume the new products that are supplied cheaper and in greater quantities. This is why the money flowing into the production and consumption markets, i.e., the real economy, does not create significant inflation. In fact, a certain level of inflation arising from the real economy, linked to income, is beneficial and not something to worry about greatly.

Inflation in underdeveloped countries like Venezuela or Brazil, which must import many goods using dollars, stems from a significant depreciation of their currency value. For example, if the currency value of a country that cannot produce TVs drops by half, the price of imported TVs doubles. In advanced countries like South Korea, where production capacity is sufficient, a large depreciation of currency value is unlikely, making this type of inflation difficult. Recently, supply chain disruptions, cited as a cause of some inflation, are more temporary than long-term phenomena. This can be easily understood by looking at cases like masks or urea solution.

In the current era, the main path for significant price increases due to monetary expansion in advanced countries is roughly one. When the expanded money does not fully flow into the real economy but instead flows into limited resource markets such as real estate or raw materials, causing their prices to rise, and this price increase is passed on to the cost of most other goods. For example, if real estate and raw material prices rise by about 50%, the consumer price index passed on to goods rises by 5-10%. The current rise in the consumer price index falls into this category. This means that if real estate and raw material prices do not rise further, future price indicators will stabilize. Since it is expected that further large increases in real estate or raw material prices will be difficult due to monetary policy shifts such as interest rate hikes, there is logic to not worry much about inflation from around next year.

In May and August of last year, I wrote editorials titled "US Interest Rate Hikes May Come Sooner Than Expected" and "Stagflation: Understanding and Responding Properly" in this publication. The main point was that since national income is not increasing significantly, rising housing prices and household debt could cause a major recession in the future, leading central banks to accelerate interest rate hikes, and that appropriate portfolios should be prepared accordingly. My biggest concern at the time was that central banks might continue to delay rate hikes, further inflating speculative asset bubbles. I no longer hold that concern.

The Nasdaq index has fallen more than the Dow Jones Industrial Average. In the current situation of monetary policy transition, it may be natural that assets whose prices surged strongly due to past powerful monetary expansion, such as cryptocurrencies or big tech stocks, experience larger declines. Some of the bubbles created so far need to be deflated to some extent. However, from a long-term perspective, the current monetary policy is expected to be beneficial for the economy and stock market going forward. This is an opportunity to carefully select the good stocks that are falling along with the market despite having solid earnings and value.

Seojun Sik, Professor of Economics, Soongsil University