Recent inflation dynamics in South Korea, Asia’s fourth-largest economy, need way more attention in the media. In November, the country saw an unexpected 0.6% month-over-month dip in its headline inflation rate, marking the most significant single-month fall in over three years. This drop dramatically deviated from the projected minor 0.2% decline.
This decrease has brought the annualized rate to its lowest level since July, following a brief inflation increase during the summer months, a trend mirrored in various global economies. The amazing thing? This happened after several months of modest gains in inflation.
Could deflation hit the world from out of nowhere?
What if inflation suddenly plummets?
South Korea’s Deflation
The reasons attributed to the South Korean case were declines in food and energy prices, factors that undeniably affect all economies worldwide. I’ve talked about oil before here on InvestorPlace as screaming that the Fed has overtightened policy against collapsing cost-push inflation. If that’s what caused such a big decline in inflation in South Korea, it begs the question: Could this happen in other regions, such as Europe and the Americas? Could this lead to a global battle with deflation instead of inflation?
Deflation, a decrease in the general price level of goods and services, often results in increased real value of money, enabling consumers to purchase more goods and services than before. However, deflation can also be detrimental, triggering a deflationary spiral and leading to economic recession. It also can result in severe volatility for financial markets.
While it is essential to consider the unique socioeconomic and political contexts of different regions, the South Korean case does present a possibility worth considering for bulls. If food and energy prices continue to drop significantly, other economies could indeed experience a similar downturn in inflation against elevated rates which are only now starting to impact the economy, when they were rising under higher oil and food prices.
It’s All About Balance
Clearly, striking a balance between inflation and deflation is a delicate act that requires careful economic management. To think that central banks can respond quickly enough to this is foolish. Long duration rates keep collapsing for a reason, and the reason is we are past the inflation wave and deflation is the risk.
Is it time to shift focus from battling inflation to preparing for potential deflation? While the answer may be complex and dependent on various factors, it is undeniable that the South Korean example provides crucial food for thought, and the firepower needed for duration bulls in the bond market to keep allocating despite all the narratives that dominated throughout the year saying otherwise.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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