Shortly after he was inaugurated in February 2008, President Lee Myung-bak selected 52 daily necessities and put their prices under tight control. Still, items whose prices gained continued to outnumber those whose prices fell.
Since inflationary pressure started to build appreciatively during the second half of last year, the Lee administration has been monitoring changes in their prices around the clock. It has been cajoling providers of goods and services not to raise their prices. If they refuse to toe the line, they face the risk of tax audits and investigations into their allegedly unfair trade practices.
Yet these efforts to keep consumer prices in check have produced few tangible results. On the contrary, they have been rising so fast that the administration has had to change its macroeconomic outlook for this year.
A case in point is a rebound in gasoline prices whose temporary cut the administration shoved down the throat of the refineries. It did not take much time until they were raised to the previous level.
The administration should have learned a lesson from its quixotic war on prices. But it has not, as evidenced by its renewed resolve to control consumer prices in a way similar to one that it tried and failed.
At a conference on prices to which he summoned ministers and ministerial-level officials on Wednesday, President Lee selected 10 items for an intensive monitoring this time and told the minister of public administration and security to make public the differences in their prices in the 16 metropolises and provinces. He also told the minister of strategy and finance to hold conferences on prices each week.
He demanded that the administration streamline distribution networks, make frequent consumer price spot checks and encourage competition for price cuts, in addition to controlling prices through tax audits and investigations into price-fixing allegations as it conventionally has done.
On Tuesday, he ordered the creation of a task force on prices headed by the senior presidential secretary for economic affairs ― an indication that his aide would take charge of coordination among pertinent ministries. Lee appeared to believe that a lack of ministerial coordination made it difficult to keep inflation in check. Maybe so.
But what was glaringly missing from his package of policy proposals was the basic tool to tame inflation ― a belt-tightening policy. Nowhere to be found was any mention of spending cuts. Nor did he mention that his administration would allow the Korean currency, if found to be undervalued as claimed by economic experts, to strengthen against the U.S. dollar ― which would cut the prices of oil and all other imports.
No less crucial in a fight against inflation is a tight monetary policy. Here again, the Bank of Korea does not commit itself to using it.
Its Monetary Policy Committee kept the benchmark rate at 3.25 percent when it held a monthly session on July 14. The next day, the central bank revised its 2011 outlook for the consumer price index from 3.9 percent to 4 percent. Had it been serious about putting inflation under control, it would have taken a preemptive action ― raising the benchmark rate by 25 basis points, if not more ― and keep the CPI outlook intact to dampen inflationary expectations.
The central bank said it wanted to be more realistic when it revised the outlook. Moreover, it said, there was no big difference between 3.9 percent and 4 percent. But it ignored the psychological effect: Companies do not set an item’s price at 3,900 won, rather than 4,000 won, for nothing.
The revision of the CPI outlook a second time in seven months is another indication that the central bank pays little attention to inflationary psychology. The outlook, initially set at 3.5 percent last December, was raised to 3.9 percent in May and to 4 percent this time. Consumers cannot be blamed for assuming that the bank is not so serious when it says it is committed to stabilizing prices.
The central bank has to tighten its monetary policy if it wishes to restore its credibility. For its part, the administration needs to commit itself to taking a belt-tightening policy next year, if not this year.