"South Korea's Stagflation Risk Limited... Prioritize Price Stability"

[Asia Economy Reporter Seo So-jeong] An analysis has emerged suggesting that the likelihood of the Korean economy entering stagflation?a situation where economic recession and high inflation occur simultaneously?is limited. Accordingly, it is recommended that policy priorities should focus on price stability rather than economic stimulus.

Jang Min, Senior Research Fellow at the Korea Institute of Finance, stated this in a report titled "The Possibility of Our Economy Entering Stagflation and Policy Implications" on the 5th.

Researcher Jang assessed, "Considering the economic conditions during past stagflation periods and recent times, the uncertainties both domestic and international such as the Ukraine war and China’s zero-COVID policy, and the policy authorities’ responses to curb inflation, it appears that while inflation will remain at a high level for a considerable period before gradually easing, the real economy is expected to slow down."

He noted that the current rise in oil prices does not reach the levels seen during past oil shocks when prices quadrupled in a short period, and that crude oil prices are about two-thirds of the 1980 or 2008 levels in real terms, indicating that the price shock is not as severe as before.

According to the report, when inflation in the United States exceeded 5%, tightening policies were implemented, and in 45% of cases, a recession occurred within four quarters, while in 62% of cases, a recession occurred within eight quarters.

Researcher Jang said, "The real economy, which currently shows growth exceeding potential levels, is likely to gradually slow down," adding, "The economic downturn is expected to begin in earnest after next year."

He emphasized, "Policy authorities should remember that one of the main causes of stagflation was the insufficient response to inflation due to concerns about economic slowdown in the past, and therefore, above all, they need to actively respond to inflation to restore the price stability trend."

He continued, "Premature economic stimulus policies could dilute the authorities’ commitment to price stability, increasing the risk of sustained inflation and weakening the ability to respond during economic slowdowns. It is necessary to establish an emergency response strategy for economic downturns based on structural reforms and close cooperation among policy authorities."