Citing the nation’s continuously falling consumer prices, local experts are raising concerns that the Korean economy may suffer deflation.

South Korea’s consumer price growth has been at the 1 percent level over the past two years. In November, the figure dropped to a solid 1 percent ― the lowest in nine months ― according to Statistics Korea.

“The Korean economy has already fallen into a de-facto deflation considering that consumer prices tend to be set about 1 percent higher than real prices,” said Sung Tae-yoon, an economics professor at Yonsei University.

Both supply and demand are fanning disinflation ― a decrease in the rate of inflation ― suggesting that the economy is slipping toward deflation, according to the experts.

On the supply side, the fall in inflation can be attributed to an oversupply of agricultural products on account of the mild weather here, along with falling oil prices triggered by a decision by the Organization of the Petroleum Exporting Countries to refrain from a production cut.

Industry watchers, however, believe that the disinflation has more to do with demand.

“The prolonged disinflation comes mainly from weak demand from economic players. Both the consumers and the companies have been reluctant to spend and invest as they do not believe the economy will get better soon,” said Sung.

If this trend continues, the economy could fall into a vicious circle.

“The expectation that (consumer) prices could go down further would keep consumers from spending, and companies from investing. This would, in turn, reduce the demand to eventually bring about an economic slowdown,” said Lee Jae-joon, a researcher at the Korea Development Institute.

In a bid to boost domestic demand, experts called on the government to take bolder action by pushing ahead with financial and monetary measures for bolstering the economy.

“The central bank has been quite optimistic about the economy for the last two years despite the ongoing slowdown. Now, it is time for them to change their stance and show a stronger willingness to boost the economy,” Sung said

Lee, citing a recent KDI report, said that, since the economic slowdown and disinflation are expected to continue, the economy could face a real deflation situation without stronger monetary policies.

By Shin Ji-hye (shinjh@heraldcorp.com)