South Korean inflation has been far lower than the U.S. for much of the past 18 months, but it’s now starting to catch up, hitting 5.4% in the month of May. 

While inflation in the U.S. has resulted from a post-pandemic uptick in demand, South Korea (as well as the Eurozone) is struggling with inflation due to external supply chain issues and price increases connected to the war in Ukraine.

Less excess savings and pent-up demand in South Korea has resulted in a far slower increase in inflation than in the U.S. But now inflation is spiking all the same, increasing the likelihood of recession on the horizon.

MONEY SUPPLY AND MONETARY OVERHANG

As the economist Milton Friedman famously quipped, “inflation is always everywhere a monetary phenomenon.” Since the start of the pandemic, the supply of money minted by the world’s major central banks has risen dramatically. 

The rise was most dramatic in the U.S., where the money supply increased by more than four times. But data from the Organization for Economic Cooperation and Development (OECD) indicates that even in the Euro area and South Korea, the overall supply of money increased considerably. 

The money supply similarly grew after the 2008 financial crisis as a result of quantitative easing (QE). But while QE increased the size of money in financial markets and bank reserves, it did not directly increase the size of household savings and consumption. 

This time around, central bank expansion of the monetary base through the purchase of government debt and other debt instruments (like mortgage-backed securities) also enabled a large fiscal expansion. 

Consequently, the U.S. ran a fiscal deficit worth over 15% of gross domestic product (GDP