Bank of Korea "Stronger Interaction Between Prices and Wages During Stagflation... Possibility of Persistent High Inflation"

Bank of Korea's 'Price-Wage Relationship Review' Report
Strong Price-Wage Interaction During High Inflation
Suppressing Spread of Expectation Psychology Is Important

[Image source=Yonhap News]

The Bank of Korea has presented an analysis stating that in a high inflation environment, if wages rise, the inflationary trend is likely to accelerate, and active policy responses are necessary to prevent this.

In the report titled "Review of the Price-Wage Relationship in Korea," published on the 25th in the BOK Issue Note, the Bank explained, "In situations where inflation is rising sharply as recently, if inflation expectations become unstable, the interaction between prices and wages may strengthen, making it impossible to rule out the possibility of high inflation becoming entrenched."

The Bank of Korea analyzed, "Although price and wage movements may diverge in the short term, a stable relationship between the two variables is maintained in the long term. Recent years’ inflation rates show a high correlation with the following year’s wage growth rates, and wage increases tend to be reflected in prices with a lag, especially in the personal services sector where labor costs have a high share."

Using data from the past 20 years, the Bank found that wages responded significantly to price shocks, adding, "While the overall consumer price index did not show a significant response to wage shocks, the personal services price index showed a significant response."

In particular, the relationship between prices and wages was clearly observed during periods of high inflation. Analyzing the 1990s, when both price and wage growth rates were high, the Bank explained that the price response to wage shocks was significant.

The Bank of Korea emphasized, "We confirmed a strong interaction between prices and wages during high inflation phases. To proactively prevent the entrenchment of high inflation, it is important to suppress the spread of inflation expectations through active policy measures."