KDI, "Inflation Slows Due to Tight Monetary Policy"

11th 'Issue Analysis: Analysis of Recent Price Fluctuation Factors and Implications'

The Korea Development Institute (KDI) recently analyzed that the decline in the consumer price inflation rate below the price stability target (2%) was largely influenced by a 'tight monetary policy.'

On the 11th, KDI released a report titled "Current Issue Analysis: Analysis of Recent Price Fluctuation Factors and Implications." According to the analysis, monetary policy had a more sustained impact on inflation rates compared to fiscal policy. It was estimated that when the benchmark interest rate falls by 1 percentage point (p), the inflation rate rises by up to 0.2%p after three quarters and the effect lasts for about two years. In contrast, when government spending increases by 1%p of GDP, the inflation rate rises by up to 0.2%p in the same quarter and the effect lasts for about one year.

Based on these findings, KDI analyzed the impact of each variable on the rise and fall of consumer price inflation since the COVID-19 pandemic. KDI concluded that the cumulative high interest rate policy since 2022 has contributed to lowering prices by 0.8 percentage points recently (as of the third quarter of this year). The consumer price inflation rate peaked in the 6% range in June-July 2022 but slowed to 1.3% last month, below the Bank of Korea’s price management target of 2%.

The inflation rate, which had surged due to pent-up demand from COVID-19 recovery and expansive fiscal policy, was actively suppressed since last year by the rapid benchmark interest rate hikes implemented from mid-2022. KDI diagnosed that as the non-policy demand effects from recovering pent-up demand subside, the inflation rate has visibly stabilized recently. KDI expects the downward trend in inflation to continue for the time being unless unexpected additional shocks occur. Therefore, it recommended that the macroeconomic policy stance be adjusted in line with this trend.