Soaring gasoline prices appear to be the latest target of the government’s anti-inflation strategy, but it remains to be seen whether policymakers can manage to calm the economy without addressing liquidity issues. / Korea Times

By Kim Tae-gyu

From the outset of the Year of the Rabbit, the appreciating prices of consumer goods have raised warning flags, which prompts the Lee Myung-bak administration to come up with a set of contingency measures.

Last month, the producer’s price index jumped to a two-year high of 5.3 percent from a year before, which tends to affect consumer prices in a few months. The prices of imports rocketed 12.7 percent year-on-year.

As the inflationary pressures continue to bring about woes along with fast-rising apartment rents, Asia’s fourth-largest economy is feared to suffer inflation of higher than 3 percent in 2011. Some even have concerns that it may even reach 4 percent.

In this climate, the government’s countermeasures appear to be overly simple and naive ― it is twisting the arms of corporations not to jack up merchandise prices.

The Fair Trade Commission has set up a task force team of late to inspect whether or not retail chains or other entities will crank up prices in collusion with each other. It will also keep an eye on any retailers who it suspects of chalking up excessive profits.

President Lee himself took issue with the high gasoline prices earlier this month and this prodded government-wide efforts to contain the fast appreciation of oil involving the National Tax Service or the Ministry of Strategy and Finance.

I am worried that such steps will incur the ridicule of experts from both at home and abroad.

First of all, bureaucrats including President Lee are not supposed to talk about gasoline prices without raising the thorny topics of the heavy taxes on oil amounting to around $15 billion a year.

As is widely known, a variety of taxes explain more than half of gasoline prices. In other words, drivers pay more to the government rather than to the refinery when they are pumping gas.

Accordingly, it is not appropriate for President Lee to bring the gasoline prices to light without comment on the indirect taxation ― an easy way to fund budgets without causing serious challenges of taxpayers.

On top of Korea, many European countries impose high tax burdens on motorists but their politicians are seemingly wise enough not to press price cuts from refineries without considering the heavy taxes.

More fundamentally, it seems the Seoul administration is taking the wrong direction in trying to tame inflation because it does not substantially reduce the ultra rich liquidity in the markets.

It is one of the time-honored beliefs that rich liquidity ends up generating inflation and the Bank of Korea released money over the past years to grapple with the economic downturn in the aftermath of the global financial crisis.

In particular, the Lee administration’s economic principles are by and large based on New Liberalism. One of its golden rules is ``inflation is always and everywhere a monetary phenomenon,’’ as U.S. economist Milton Friedman claimed.

Just reduce the liquidity through various fashions like open market manipulation. Be serious, or we will experience the faces of a specter dubbed inflation, which would be as gloomy as those of economic downturns.