[First Livelihood Measure of Yoon Administration] MB Price Index is Price Control... Yoon Government Takes It as a Lesson

The 1st Economic Relations Ministers' Meeting
Announces Market-Friendly Response Principles

Determined Not to Repeat MB Government's Mistake
That Actually Fueled Overall Price Inflation

Recent Inflation Driven Mainly by Supply Factors
Experts Say Effects May Be Limited

The consumer price inflation rate in April soared to the high 4% range, the highest level since the 2008 financial crisis. On the 3rd, citizens were shopping at Yeongcheon Market in Seodaemun-gu, Seoul. Photo by Moon Honam munonam@

[Asia Economy Reporter Seo So-jeong] The Yoon Seok-yeol administration is seeking to differentiate itself from past governments by announcing a market-friendly approach to tackling high inflation. This is interpreted as a determination not to repeat the failure of the previous Lee Myung-bak administration, which created the ‘MB Price Index’ to manage prices affecting ordinary citizens and effectively imposed price controls. However, experts believe that the recent inflationary pressures, largely driven by supply-side factors such as rising international raw material prices due to the Ukraine crisis, may limit the effectiveness of these measures.

On the 30th, the government held the 1st Economic Ministers’ Meeting at the Government Seoul Office, chaired by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho. The government announced that it would move away from price control-centered inflation management and adopt a market-friendly and timely response principle, including support for cost reduction efforts. Deputy Prime Minister Choo emphasized, "Under the principle of market-friendly price management, we will respond swiftly to price issues related to daily necessities and raw materials," adding, "More fundamentally, we will improve the overall price structure through sector-specific supply chain management, advancement of distribution and logistics, and establishment of fair competition order."

The Yoon administration’s emphasis on ‘market friendliness’ in its first inflation countermeasure stems from the failure of price control-centered inflation management during the Lee Myung-bak administration. At that time, as soaring prices unsettled the public, President Lee introduced the ‘MB Price Index’ after taking office. On March 25, 2008, the Ministry of Strategy and Finance announced the ‘Inspection and Response Plan for Daily Necessities to Stabilize Ordinary Citizens’ Lives,’ selecting 52 daily necessities across various sectors such as rice and agricultural products, private academy fees, and public utility charges for intensive price monitoring. The Fair Trade Commission was appointed as the price monitoring agency, establishing a ‘Price Instability Item Monitoring and Response Task Force’ and closely monitoring processed food companies.

However, these items ultimately showed a greater rate of increase than the general price index, and some even argued that they fueled overall inflation. It was criticized that the government could not easily control international oil prices, which directly affect consumer prices, and that artificially controlling prices, which are influenced by the market economy, through monitoring alone was insufficient. Some scholars criticized this as ‘the 5th Republic-style state-controlled economy and price control.’

According to the Bank of Korea, international oil prices surged from 2007, with the average monthly price of Dubai crude oil reaching $131.2 per barrel in July 2008, the highest level since the second oil shock (1979?1980). The won-dollar exchange rate soared to an average of 1,453.35 won in March 2009 due to deleveraging caused by the global financial crisis, peaking since the foreign exchange crisis before sharply falling. Supply shocks caused by the sharp fluctuations in international oil prices and the won-dollar exchange rate influenced consumer price trends.

Kim Jeong-sik, Professor Emeritus at Yonsei University, said, "In 2008, the government changed from the Roh Moo-hyun administration to the Lee Myung-bak administration, and the overall economic situation, including rising international raw material prices, won-dollar exchange rate increases, and trade deficits, was similar to the current situation." He added, "Even if the Yoon administration tries to lower inflation with market-friendly policies, it will be difficult to achieve significant effects due to rising raw material prices, costs, and wages."

In particular, the government’s review and approval of the second supplementary budget (supplementary budget) amounting to 62 trillion won, which injects liquidity into the market, increases the risk of further stimulating inflation. Sung Tae-yoon, Professor of Economics at Yonsei University, said, "There is no sharp measure to curb inflation amid soaring international raw material prices," adding, "Ultimately, the Bank of Korea will have no choice but to continuously raise the base interest rate to suppress demand and lower inflation expectations through consistent signals of rate hikes."