"Corporate Perceived Inflation Rate Rises to 10%... Caused by Raw Material Price Increase"

Inflation Control Target of 2.0% Significantly Exceeded

[Asia Economy Reporter Seo So-jeong] Domestic companies' inflation expectations for the next year were found to be in the 10% range, significantly exceeding the price stability target level of 2%. Additionally, companies tended to overestimate the actual inflation rate of the past year.

According to the report "Characteristics and Implications of Corporate Price-Setting Behavior and Expected Inflation" released by the Bank of Korea on the 28th, a survey conducted from November 2020 to January 2021 targeting 1,572 domestic companies showed that the inflation rate (price increase rate) perceived by companies over the past year averaged 9.7%.

The expected inflation rate for the next year was also 10.6%, greatly surpassing the price management target of 2.0%.

Nam Yoon-mi, Associate Research Fellow at the Microeconomic Institution Research Division of the Bank of Korea’s Economic Research Institute, stated, "Since the outbreak of COVID-19, companies’ perceived price increases due to rising raw material prices have led to high expected inflation among companies," adding, "The sharp rise in raw material prices, such as the rebound and rapid increase in crude oil prices after their steep fall due to decreased demand in April 2020, is a key factor."

Associate Research Fellow Nam analyzed, "The low utilization of macroeconomic indicators in corporate management and the low awareness of the price stability target system also contributed to raising companies’ expected inflation."

Furthermore, the survey revealed that corporate price rigidity has eased compared to the 2016 survey. This means that more companies are regularly checking price adjustment factors and reflecting them in prices as soon as they are identified. Price rigidity refers to the gradual adjustment of prices by economic agents despite the occurrence of price adjustment factors due to various practical constraints.

Nam explained, "Price rigidity was found to be weaker in manufacturing than in non-manufacturing, weaker in small and medium-sized enterprises than in large corporations, weaker when the proportion of regular and long-term contract customers is low, and weaker in private companies and general consumer customers than in public institutions."

He added, "Given that price rigidity has eased compared to 2016 and heterogeneity in price rigidity among companies has expanded, it is necessary to pay attention to the possibility of changes in the transmission effects and persistence of monetary policy."