Rising Prices and High Interest Rates: When Will They End?

 

 

Rising Prices and High Interest Rates: When Will They End?

Introduction

Recent rapid price increases and interest rate hikes have caused significant hardship for many citizens. When will these high prices and high interest rates finally end? Experts offer a variety of perspectives.

1. Causes of Rising Prices

The primary factors contributing to the current surge in prices include:

• International energy price hikes: The war in Russia and Ukraine has disrupted energy supplies and driven up international energy prices due to increased demand. This has led to domestic energy price increases, impacting overall prices.
• Supply chain disruptions: The COVID-19 pandemic continues to cause supply chain disruptions, particularly due to lockdowns in China. These disruptions have significantly impacted global supply chains, leading to increased production costs and higher prices.
• Surging raw material prices: Prices for key raw materials such as steel, copper, and oil have risen, causing production costs in the manufacturing sector to increase. This, in turn, has led to higher prices for consumer goods.
• Exchange rate fluctuations: The recent weakening of the Korean won against the US dollar has contributed to rising import prices, further exacerbating price increases.

2. Background to Interest Rate Hikes

Central banks are raising interest rates to combat inflation. By increasing borrowing costs for households and businesses, interest rate hikes aim to curb consumption and investment, thereby dampening price pressures. However, concerns exist that interest rate hikes could trigger an economic downturn.

3. Experts' Outlook

Experts find it difficult to pinpoint an exact end date for high prices and high interest rates. However, most anticipate these conditions to persist for a considerable period.

• International financial institutions: The International Monetary Fund (IMF) projects global inflation to average 6.6% in 2023 and decelerate to 4.3% in 2024. The Bank of Korea forecasts consumer price inflation in Korea to reach the upper 5% range in 2023 and moderate to the upper 3% range in 2024.
• Private research institutes: The Hyundai Economic Research Institute predicts Korea's consumer price inflation to hit 5.3% in 2023 and ease to 3.5% in 2024. The Korea Development Institute (KDI) projects Korea's consumer price inflation to reach 5.2% in 2023 and moderate to 3.6% in 2024.

4. Factors Affecting the Outlook

Key factors influencing the outlook for high prices and high interest rates include:

• International energy price movements: International energy prices can fluctuate based on the situation in Russia and Ukraine, developments in the Middle East, and the global economic landscape. Energy price declines could contribute to easing price pressures, while further increases could lead to more severe inflation.
• Supply chain improvements: Resolving supply chain disruptions caused by the COVID-19 pandemic could lead to reduced production costs and price stabilization. However, the pandemic's persistence or new unforeseen factors could prolong supply chain issues.
• Raw material price fluctuations: Raw material prices can fluctuate based on global economic conditions, demand changes, and government policies. Raw material price declines could contribute to easing price pressures, while further increases could lead to more severe inflation.
• Exchange rate movements: Exchange rate fluctuations impact prices through import price movements. A strengthening Korean won against the US dollar could lead to lower import prices and contribute to price stabilization. Conversely, a continued weakening of the won could exacerbate price pressures.
• Government policies: Governments are implementing fiscal and monetary policies to curb inflation and promote economic growth. The effectiveness of these policies will vary depending on economic conditions and could influence the outlook for prices and interest rates.

5. Preparing for High Prices and High Interest Rates

Individuals can consider the following strategies to prepare for high prices and high interest rates:

• Adjust spending habits: Reduce unnecessary consumption and opt for more affordable products to lower expenses.
• Save and invest: Build a financial safety net and grow assets through saving and investing. Carefully consider risks and make informed investment decisions.
• Manage debt: Lower debt levels and reduce interest burdens.
• Increase income: Pursue opportunities to enhance income through skill development or starting a side hustle.

6. Conclusion

High prices and high interest rates pose significant challenges to the current economy. However, experts anticipate long-term price stabilization. Individuals should prepare for these challenging times by adopting strategies such as adjusting spending habits, saving and investing, managing debt, and increasing income. Additionally, governments must implement proactive policies to achieve simultaneous price stabilization and economic growth.