Low Inflation in the Korean Economy
The recent inflation rate in Korea has been quite low. The Consumer Price Index, which reflects price levels seen in daily life, grew in the zero percent range until the middle of last year, and eventually recorded a negative growth rate in September. The GDP deflator, which represents a country’s overall price levels, also exhibited negative growth for the third consecutive quarter, raising concerns over the current situation.
Low inflation is likely to lead to a fall in prices, and a prolonged fall in prices could lead to deflation. When deflation occurs, the value of cash increases, so private economic agents are more likely to hold cash and reduce consumption and investment. Meanwhile, falling product prices lead firms to cut supply, leading to lower wages for workers; falling wages will reduce the purchasing power of labor, which in turn causes prices to drop again due falling in demand.