"Rising Expected Inflation Already Puts Upward Pressure on Prices... High Possibility of Further Expansion"

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] The Bank of Korea forecasted that the rise in expected inflation regarding prices is already partially acting as an inflationary pressure and that this pressure is likely to expand further in the future.

In its Monetary and Credit Policy Report on the 9th, the Bank of Korea stated, "Short-term expected inflation is estimated to be influenced by consumer prices in quarters 1 to 4 and then to affect prices again after quarters 3 to 4."

Especially during periods of rapid price increases like recently, economic agents tend to quickly incorporate new information into their expectations, strengthening the interaction between expected inflation and prices.

When estimating the rate at which new information is reflected in the formation of short-term (next 1 year) inflation expectations of the general public and experts, the Bank of Korea found that this rate was approximately 38% and 20% for the general public during inflationary and slowdown periods respectively, and 62% and 31% for experts respectively, indicating that the rate of new information incorporation during inflationary periods is about twice as high.

This is interpreted as being due to more information related to prices being provided through media articles during inflationary periods and the increased sensitivity of economic agents to price information due to a decrease in real income.

Additionally, the recent inflationary spillover from rising expected inflation has mainly appeared through wage and corporate price-setting channels.

Looking first at the wage channel, the rise in fixed wages, which are relatively more influenced by price factors, has been steadily expanding. The Bank of Korea explained, "Analysis results show that shocks to expected inflation have the greatest impact on fixed wages after three quarters," adding, "Inflationary pressure through the wage channel is likely to gradually increase in the future."

Regarding the corporate price-setting channel, amid a sharp rise in the recent sales price BSI, the proportion of producer price items subject to price increases has significantly expanded, and the magnitude of the increases is higher than in previous years. Considering the high level of expected inflation and the continued rise in raw material prices, it is judged that the incentive for companies to raise prices will persist for some time, acting as a factor that increases inflationary pressure.

However, the Bank of Korea assessed that the recent domestic long-term expected inflation has generally settled at the price stability target level.

The Bank of Korea emphasized, "Considering the sharp rise in nominal wages and the expansion of companies' sales price increases, the recent rise in short-term expected inflation is already partially acting as inflationary pressure and there is a high possibility of further expansion," adding, "policy responses to stabilize expected inflation are necessary to prevent the prolonged impact of inflation shocks."