🚨 Price Index

Today Korean Social News for Beginners | 2025.10.08

0️⃣ Government Price Control Policy and 70 Years of Light and Shadow

📌 Government Declares 'War on Prices'… Light and Shadow of 70 Years of Price Control

💬 The government has announced a strong response plan, raising suspicions of collusion and monopoly regarding recently soaring grocery prices. President Lee Jae-myung said, "The surge in food prices is a problem with government functions," and ordered related ministries to take action. Since liberation, the government has managed prices through various means such as price caps, enacting price stability laws, administrative guidance, and monetary policy. However, evaluations show that policy effectiveness has reached its limits in the face of external factors such as rising international oil prices and soaring grain prices, as well as structural factors. Experts point out that improving distribution structures and market efficiency is more important than government intervention.

💡 Summary

• A price index is an indicator that shows changes in the prices of goods and services over a certain period.
• The government is cracking down using even the National Tax Service and police, raising suspicions of collusion regarding rising food prices.
• The effect of price control policies that have continued for 70 years is limited, and improving market structure is needed.

1️⃣ Definition

A price index is an economic indicator that shows how much the prices of goods and services have changed compared to a base period. The most common one is the Consumer Price Index (CPI), which measures price changes in items that households actually buy.

The price index is a key standard for judging people's purchasing power, economic trends, and monetary policy direction. When prices rise quickly, the value of money falls and you can buy fewer things with the same amount of money. On the other hand, when prices fall, consumption and investment shrink, which can lead to economic recession.

💡 Why is it important?

• It is a key indicator for understanding people's real standard of living and purchasing power.
• It is an important standard for central bank interest rate policy and government economic policy decisions.
• It is used as basic data for wage negotiations, pension adjustments, and calculating various allowances.
• It is the starting point for policy design for economic stability and people's livelihood stability.

2️⃣ History and Current Status of Korea's Price Control Policy

📕 Post-Liberation to 1970s: Era of Direct Control

• This was a period when the government directly set prices. Main contents are as follows:

  • Right after liberation, experiencing severe inflation, the government introduced price caps on major necessities.
  • In the 1950s, after the Korean War, the government controlled prices of grains like rice and barley, as well as coal and fuel.
  • In the 1960s-70s during economic development, price stability was set as the top priority.
  • In 1973, the 'Act on Price Stability' was enacted, legalizing price control.

• Strong administrative measures were used. Main methods are as follows:

  • Price inspection teams went around markets to monitor prices and catch violating businesses.
  • Hoarding was severely punished, and the government directly managed distribution and sales of essential goods.
  • Wage freezes and suppression of public utility rate increases were implemented together.
  • Despite the government's strong will, prices continued to rise due to external shocks like oil crises.

📕 1980s-90s: Shift Toward Market-Centered Approach

• Gradually shifted to respect market principles. Main changes are as follows:

  • In the 1980s, price liberalization measures were implemented step by step.
  • Policy direction changed to improving distribution structure and promoting competition rather than direct control.
  • In the late 1990s, after the financial crisis, the Bank of Korea introduced an inflation targeting system.
  • Monetary policy became the central tool for price management.

• The government's role changed to monitor and coordinator. Main features are as follows:

  • Started managing prices indirectly through cracking down on unfair trade and regulating collusion.
  • The Fair Trade Commission emerged as a key agency for establishing market order.
  • Monetary policy through interest rate adjustment became the main tool for price management.
  • However, the practice of announcing emergency measures when necessity prices surged continued.

📕 2000s Onward: Global Factors and Policy Limitations

• International market fluctuations began to directly affect domestic prices. Main phenomena are as follows:

  • During the 2008 global financial crisis, international oil and grain prices surged, raising domestic prices too.
  • The Lee Myung-bak government introduced the 'MB Price Index' selecting 52 necessities, but the effect was limited.
  • In the 2020s, prices surged again due to the COVID-19 pandemic and supply chain problems.
  • In 2022-2023, energy and food prices soared due to the Russia-Ukraine war.

• Doubts about the effectiveness of government intervention grew. Main problems are as follows:

  • Short-term price crackdowns had only temporary effects and were not fundamental solutions.
  • Structural problems of inefficient distribution structure and high intermediary margins continued.
  • Government emergency measure announcements were criticized as just political gestures.
  • There were also criticisms that it caused market distortion and discouraged corporate investment.

💡 Major Limitations of Price Control Policy

1. Cannot control external factors: The government cannot control overseas factors like international oil prices and grain prices
2. Temporary effects: Crackdowns and regulations have only short-term effects and are not fundamental solutions
3. Market distortion: Excessive intervention distorts price signals and makes resource allocation inefficient
4. Structural problems unresolved: Inefficiency at distribution stages and excessive intermediary margin problems remain
5. Political populism: Tendency to overuse short-term price measures before elections

3️⃣ Current Government Response and Future Outlook

✅ Recent Government Strong Response Measures

• Comprehensive investigation into collusion and monopoly suspicions is underway. Main contents are as follows:

  • The government suspects collusion between large retailers and food companies as the cause of recent food price surges.
  • The Fair Trade Commission has started cartel investigations, and the National Tax Service is conducting parallel tax audits.
  • The National Police Agency is investigating illegal price collusion charges.
  • All related ministries are jointly inspecting the overall distribution structure.

• Measures to stabilize necessity prices are being announced one after another. Main plans are as follows:

  • The government is promoting discount events for major items and expanding direct trade markets.
  • Measures to release public stockpiles to increase market supply have been implemented.
  • Mid- to long-term plans to improve agricultural product distribution structure are being prepared.
  • Support measures to reduce costs for small business owners and self-employed are also being considered.

✅ Expert Evaluations and Recommendations

• Voices pointing out the limitations of government intervention are strong. Main opinions are as follows:

  • Economists point out that crackdown-centered approaches cannot be fundamental solutions.
  • External factors like international grain prices, exchange rates, and logistics costs have greater impact.
  • Various past governments announced similar measures, but effects were temporary.
  • An approach that respects market mechanisms while improving structural problems is needed.

• Distribution innovation is proposed as a practical solution. Main plans are as follows:

  • Distribution channels that directly connect producers and consumers should be expanded.
  • Investment to reduce intermediary distribution stages and increase logistics efficiency is needed.
  • Promoting competition through online distribution and new distribution models is important.
  • Price information systems that help consumers make rational choices should be strengthened.
  • Long-term investment to improve productivity and stabilize supply in agriculture and livestock is necessary.

4️⃣ Related Terms Explanation

🔎 Consumer Price Index (CPI)

• The Consumer Price Index measures household grocery prices.
  • The Consumer Price Index (CPI) is a measure of price changes in goods and services that urban households buy in daily life. The Statistics Korea announces it monthly, surveying prices of about 460 items at retail stores and service businesses in major cities nationwide.
  • Main uses of CPI are: First, it is the standard for measuring inflation rate. Second, it is used as a key indicator for the Bank of Korea's monetary policy decisions. Third, it is the basis for calculating wage increase rates and pension adjustment rates. Fourth, it is used as basic data for various economic statistics including real GDP calculation.
  • CPI is calculated with the base year as 100, and Korea currently uses 2020 as the base year (2020=100). For example, if CPI is 105, it means prices have risen 5% compared to the base year. Item weights are regularly adjusted to reflect the actual proportion of household consumption expenditure.

🔎 Inflation Targeting System

• Inflation targeting is a system where the central bank sets a target price and operates monetary policy to achieve it.
  • Inflation Targeting is a policy framework where the central bank presents a medium-term inflation rate target in advance and adjusts monetary policy tools like interest rates to achieve it. The Bank of Korea has adopted this system since 1998.
  • Currently, the Bank of Korea's inflation target is 2% based on consumer price increase rate. It sets targets every three years in consultation with the government and adjusts the base interest rate to achieve them. If inflation is higher than the target, it raises interest rates to reduce money supply, and conversely lowers rates to boost the economy if inflation is too low.
  • The advantages of the inflation targeting system are that it increases policy transparency and predictability, and strengthens central bank accountability. However, there are also limitations in responding to price fluctuations caused by external factors like exchange rate changes and international commodity prices.

🔎 Act on Price Stability

• The Act on Price Stability is a law that legalizes the government's price control authority.
  • The 'Act on Price Stability' enacted in 1973 provides legal grounds for the government to take necessary measures to stabilize prices. This law was created for systematic response when prices surged due to the oil shock in the early 1970s.
  • Main contents of the law include: First, provisions prohibiting and punishing hoarding. Second, it includes regulatory provisions on unfair trade practices. Third, there are regulations on mandatory price display and limiting unreasonable price increases. Fourth, it provides legal grounds for price investigation and monitoring activities.
  • Based on this law, successive governments have implemented emergency measures when prices surged. However, criticism about conflicts with market economy principles and excessive government intervention has been continuously raised. Recently, there are also discussions about reviewing the effectiveness and necessity of this law.

🔎 MB Price Index

• The MB Price Index is a necessity-centered price monitoring system introduced by the Lee Myung-bak government in 2008.
  • The MB Price Index was created during the 2008 global financial crisis by the Lee Myung-bak government to intensively manage prices of 52 daily necessities that directly affect ordinary people's lives. Key grocery items like rice, ramen, tofu, eggs, and gasoline were included.
  • The government surveyed and announced prices of these items weekly and implemented emergency measures when prices surged. It actively intervened by requesting price reductions from large retailers and manufacturers and encouraging discount events. Release of public stockpiles and import expansion measures were also implemented together.
  • However, this policy produced paradoxical results. Prices of the 52 items included in the MB Price Index rose even more than general consumer prices. It was criticized that excessive government intervention distorted market price mechanisms and caused businesses to pass on costs. This case is cited as a representative example showing the limitations of direct government price control.

5️⃣ Frequently Asked Questions (FAQ)

Q: Why is it difficult for the government to control prices?

A: Government direct control has limitations due to the complexity of market mechanisms and international factors.

• Prices are very difficult for the government to directly control because countless factors work together to determine them. First, the government cannot control overseas factors like international commodity prices and exchange rates. International grain prices and oil prices, which are major causes of recent food price increases, are determined by global supply chains and geopolitical factors. Second, price control that ignores market supply and demand principles can actually create shortages or black markets, causing side effects. Third, fundamental solutions are difficult with simple crackdowns due to the complexity of distribution structures.
• Looking at past cases, direct government intervention had only short-term effects and caused market distortion in the long term. Paradoxical situations like the MB Price Index case, where intensively managed items actually rose more, also occurred. Experts advise that the government's role should focus on market monitoring, cracking down on unfair practices, improving distribution structures, and promoting competition rather than direct price control.

Q: How should consumers respond to rising prices?

A: It is important to consume rationally, use information, and actively use government support programs.

• There are several ways consumers can respond to rising prices. First, rational consumption through price comparison is most basic. Since the same product can have large price differences depending on the seller, it's good to use online price comparison sites or apps. Second, you can reduce grocery costs by using seasonal foods and substitute foods. Third, large retailers' private brand (PB) products often have similar quality but lower prices. Fourth, actively use direct trade markets and discount events operated by the government and local governments.
• You can also use government price support policies. Check if you qualify for various support programs like energy vouchers, grocery price discount coupons, and traditional market Onnuri gift certificates. Most importantly, avoid impulse buying and develop planned consumption habits. Using household account apps to manage spending can reduce unnecessary expenses.

Q: What is the principle of adjusting prices through monetary policy?

A: It affects prices by controlling money supply and consumption in the market through interest rate adjustment.

• The central bank manages prices by adjusting the base interest rate. It raises rates when prices surge, and lowers them when the economy is depressed and prices are too low. The mechanism of rate increases is as follows. First, when rates rise, loan interest increases, reducing business and household borrowing. Second, savings increase while consumption and investment decrease. Third, demand decreases as money circulating in the market decreases. Fourth, price increase pressure eases due to decreased demand.
• Conversely, rate cuts have the effect of boosting the economy. As loans become easier and consumption increases rather than savings, the economy revives and prices rise to appropriate levels. However, since monetary policy effects appear with a time lag of 6 months to 1 year, it is difficult to expect immediate price stabilization effects. There are also limitations that monetary policy alone cannot prevent price increases due to external factors like international oil or grain prices. Therefore, the Bank of Korea carefully decides interest rates considering various economic indicators comprehensively.

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