[Choesangmok No.100 Days] All-Out Effort Amid High Inflation and Domestic Demand Recovery Challenges

Responding to Price Pressures from Agricultural Food Prices and Oil
Choi Diagnoses "Complex Crisis"... Tightening Response Measures
18 Visits to Livelihood Sites, 60 Vice Minister Meetings Held

Choi Sang-mok, Deputy Prime Minister for Economic Affairs and Minister of Strategy and Finance, who leads the second-term economic team of the Yoon Suk-yeol administration, will mark his 100th day in office on the 6th. The economic team, which started amid a severely depressed domestic demand crisis due to prolonged high inflation and high interest rates, has been running a hectic 100 days, responding to the real estate project financing (PF) default risk triggered by the Taeyoung Construction workout (corporate restructuring) incident and pouring out various measures to stabilize people's livelihoods.

At the time of Deputy Prime Minister Choi's inauguration, there was widespread concern that a stagflation phase might occur as low growth coincided with the so-called three highs (high inflation, high interest rates, and high exchange rates). Major economic forecasting institutions lowered South Korea's economic growth rate to the low 2% range, and the annual trade balance deficit continued. This was the result of a complex interplay of external adverse factors such as the weaponization of resources by countries and supply chain variables intensifying on the global stage amid the Ukraine and Middle East wars and the US-China hegemonic rivalry. The prolonged effects of high inflation and high interest rates, coupled with sluggish household income, further dampened domestic demand recovery.

Choi Sang-mok, Deputy Prime Minister for Economic Affairs and Minister of Economy and Finance, is attending the Emergency Economic Ministers' Meeting held at the Government Seoul Office in Jongno-gu, Seoul on the 14th. Photo by Jo Yong-jun jun21@

Deputy Prime Minister Choi, who took the helm of the second-term economic team, diagnosed the economic situation as a "complex crisis." In his inaugural speech, he emphasized, "We will swiftly stabilize the inflation trend and spread the recovery momentum of exports to all areas of people's livelihoods and domestic demand, making every effort to restore the livelihood economy."

Thus, he devoted the first 100 days to stabilizing prices and revitalizing domestic demand. Starting January 16, he held ministerial meetings with related ministries every two weeks (six times) to discuss price trends and countermeasures and continued on-site visits. Beginning with a visit to Yeongcheon Market in Seoul on December 13 last year as a nominee, he visited Garak Market (January 23), apple farms in Chungbuk (January 29), Incheon Airport Customs (January 30), Seongnam Hanaro Mart (March 25), and the Apple Research Center (April 1) after taking office. He visited livelihood sites 18 times in total. He held 60 vice ministerial meetings to check and respond to the overall economic situation, including prices, livelihoods, finance, and exports.

He provided a 200,000 won electricity bill discount to 1.26 million small business owners and doubled the income deduction rate from 40% to 80% when using credit cards at traditional markets in the first half of the year. About 150 billion won of fiscal support was injected to stabilize agricultural and livestock product prices, and to reduce the burden on citizens, 32 out of 91 fees were revised after a review of nuclear power-related fees, marking the first adjustment since the fee system was introduced in 2002. Since the budget was insufficient, policies to cut taxes were mobilized in full.

However, four days before the 100th day of his inauguration, the inflation report Deputy Prime Minister Choi received was not very favorable. Prices, which seemed to have eased, rose again to the 3% range due to soaring fruit prices and international oil price instability. The consumer price index (CPI) inflation rate in March (year-on-year) was 3.1%, marking two consecutive months above 3% since February (3.1%). It had dropped to 2.8% in January but rose again. The controversial apple price, the main culprit of the price surge, soared nearly 90% compared to a year ago, recording the highest increase in 40 years since the government began compiling statistics.

The outlook is not bright either. The government forecasts an annual consumer price inflation rate of 2.6% this year, expecting that the inflation rate will not fall below 3% in the first half.

As prices, a barometer of public sentiment, continued to surge, Deputy Prime Minister Choi attempted to calm concerns by saying, "Inflation will peak in March and stabilize rapidly in the second half." However, there are too many adverse factors to be optimistic about the inflation trend. International oil prices are fluctuating again due to geopolitical risks. Brent crude oil approached $90 per barrel. Major investment banks (IBs), including JP Morgan, forecast Brent crude oil to soar to $100 per barrel by September.

Deputy Prime Minister Choi's remaining task is to devise more meticulous domestic demand measures. To reach the government's target inflation rate in the 2% range in the second half, more detailed domestic demand strategies need to be formulated. There is still room for managed price increases, such as the end of the fuel tax cut after the general election and possible increases in electricity and gas rates.

Professor Seok Byung-hoon of Ewha Womans University School of Economics said, "Government support measures are only temporary and cannot be a fundamental solution," adding, "With real income declining due to high interest rates and high inflation, it will be difficult to restore consumer sentiment." High inflation is also an obstacle to interest rate cuts in the second half. If external risks beyond the control of policymakers, such as rising international oil and raw material costs, increase further, there are concerns that Deputy Prime Minister Choi will find it difficult to firmly control the high inflation trend during the remainder of his term.