firmly in place has been confirmed through an abundance of historical evidence.
Eggflation? Fishflation? The problem is the government
Over the past year, corn prices in the global commodity market have jumped 90 percent, with wheat and bean soaring 30 percent to 60 percent. Global oil prices are also rising. Price gains have become a prevalent global phenomenon. Consumer price growth in January was 4.9 percent in China, 6.0 percent in Brazil, 7.0 percent in Indonesia, 4.0 percent in the U.K., 1.6 percent in the U.S., and 2.4 percent in the euro zone from a year earlier. South Korea`s consumer inflation accelerated to 4.5 percent in February.
Is rising commodity prices the cause of inflation?
It is widely believed that the high inflation problem around the world has been triggered by a fast rise in global commodity prices, including oil and agricultural products. Higher raw material costs boost product prices, which ends up with a rise in overall prices. The explanation looks plausible but misleading.
Prices of some raw materials such as oil, corn, wheat and bean increase mainly in two cases.
The first case is when there is a change in demand or supply or both in the market. A poor crop due to bad weather conditions drives up bean prices, which in turn adds pressures to prices of food products made of bean. What`s noticeable is a change in demand or supply in the market does not cause inflation. It`s hard to imagine that prices of laptops will rise due to higher bean prices. When beans become more expensive, consumers will demand less and producers will boost output, thus making any price hikes in beans and related foods short-lived.
Expansionary monetary policy is the real culprit of inflation
Second is when a rise in money supply boosts demand for goods and services. By definition, only this case applies to inflation. Prices of every goods do not rise simultaneously even in an inflation and they do not advance at the same speed and extent. Prices of goods and services tend to increase one by one and inconsistently, depending on which industry or market is first affected by an increased money supply. Therefore, the word of "price levels" can be misleading. The degree and period of inflation depends on how much money supply increases and for how long. Prices of some goods can decline even under inflation. Good examples are high-tech products such as computers over the past two decades. Therefore, "eggflation" or "fishflation" is a misleading compound word.
Then how should we understand the recent sharp rise in consumer prices, with costlier commodities around the world and more expensive food at home? Each nation slashed their borrowing costs to record-low levels in order to cope with the global recession in 2008 and has increased liquidity over the past two years. The consequence is a rise in oil and commodity prices. At the same time, a poor crop cut the production, adding more pressures. After passing the early stage of inflation where prices of a few goods are rising, we`re now in the middle stage of inflation with price pressures are mounting on many foods and services.
Wrong analysis of inflation gives an excuse to policymakers
It is hard to differentiate between inflation fuelled by money supply increase and price hikes in certain goods due to a change in the market conditions as two forces are working together. In this case, even economists can understand the situation only with accurate economic theories.
It is a mistake to blame rising oil and commodity prices for the current global inflation by calling it eggflation. Such a wrong analysis will exempt governments and central banks from the responsibility for inflation. Then it will make the fight against inflation more difficult and induce recurrent inflation problems as the history proves it. Whenever inflation problem deteriorates, the government, the problem maker, blames and regulates speculators (mostly for real estate), commodity producers (often oil producing countries), wholesalers and retailers (mostly for collusion), and all citizens (frequently for inflation expectations).
Jeon Yong-duk / professor of economics at Daegu University