[The Editors' Verdict] The 'MB Price Index' Knows the Truth

History repeats itself. We have learned to use past history as a lesson, but strangely, similar types of incidents keep recurring. Whenever this happens, there is always a voice saying that this time we must break the vicious cycle by learning from the failures of history. This thought comes to mind as we face an economic crisis situation again after 14 years since the 2008 global financial crisis.

The biggest concern of the Lee Myung-bak government (MB government), which took office just before the global financial crisis, was inflation. The inflation rate started at 3.6% (February 2008) when the MB government took office, but by July of that year, it had surged to 5.9%, nearly 6%. The main culprits behind the inflation were the sharp rise in international oil prices and grain prices due to abnormal weather conditions, just like now. The MB government responded loudly by announcing the ‘MB Price Index,’ which formed the basis for price control, but the cries of the common people only grew louder. However, a reversal occurred within a year. The inflation rate, which peaked in July 2008, dropped sharply to 1.6% exactly one year later in July of the following year. To exaggerate a bit, the situation had turned from worrying about high inflation to worrying about low inflation. Was this because the MB government’s inflation measures worked? Considering that the inflation rate of the items in the MB Price Index was 1.6 times higher than the overall consumer price inflation rate over five years, it is clear that this policy was not effective. Ironically, this was the result brought about by the global financial crisis. The chain of bad finance spread to the real economy through household and corporate bankruptcies, causing consumer sentiment to freeze rapidly, which then led to a drop in prices.

In the storm of the financial crisis, the MB Price Index seemed to disappear from the minds of the people. However, this price index was revived under the Moon Jae-in government, which was a different administration, as the ‘Dining-out Price Disclosure System.’ The Moon government made a misstep by publicly disclosing the prices of 12 dining-out items such as hamburgers and chicken every week to curb rising prices toward the end of its term, but it had no effect. This showed once again, under a different administration, that managing the prices of processed goods as well as agricultural and livestock products is fundamentally impossible.

What about the Yoon Suk-yeol government’s response to inflation? The repeated history and two failures are not much different. Although it seemed to take a different approach by focusing on cost reduction rather than price control at the start, it is ultimately following the path of price control. After President Yoon Suk-yeol’s ‘interest business’ remark, the ruling party and the Yoon administration’s economic team are urging companies to share the pain. This is happening just as the United States and the rest of the world are worried about a recession. It strangely resembles the history of 2008.

So, can a great turnaround be achieved again in a year? To conclude, it is not easy. Although the main culprits of high inflation seem similar, the other circumstances are completely different. Unlike back then, when the whole world engaged in quantitative easing to the extent of zero interest rates to prevent a recession, now the money supply is being tightened rapidly to curb high inflation. The supply chain crisis caused by COVID-19, the Russia-Ukraine war, and currency wars are also ongoing crises.

The bigger problem is that the Yoon government has diagnosed the complex crisis but has not provided specific remedies in a timely manner. This is why it is expanding fiscal spending, which is out of sync with price stabilization, and why it is reverting to the price control method it previously said was wrong. However, universal fiscal support like in the past may rather stimulate inflation and make vulnerable groups suffer more. Price control on companies could also lead to structural adjustments later for companies to survive. What is needed now is detailed, targeted support policies only for vulnerable groups such as low-income households and small self-employed businesses, not a ‘must do now because we are suffocating’ approach. Given that it is already a government with a minority ruling party and a majority opposition, there is not much that can be done.