An Empirical Analysis for Determinants of Inflation in Korea: Based on Testing for the Validity of Agflation

Purpose - This study examines the determinants of inflation in Korea, which includes the validity for the evidence of agflation. Design/Methodology/Approach - This study used monthly data from January 2003 to September 2021, which included the consumer price index (CPI) equation, food price index equation, and CPI inflation transmission equation. The econometric procedures were utilized by ordinary least square (OLS), instrumental variable (IV), three stage least square (3SLS) for time series data, and adopted by vector autoregression (VAR), and vector error correction model (VECM) for multivariate analysis Findings - First, the increase in real gross national income (GNI), oil prices, and food related CPI contributed to the increase in overall CPI. Second, the increase in meat and dairy-related CPI denoted the increase in the agri-food related CPI. Finally, the entire inflation had bi-directional Granger causality with agri-food and oil related inflation, and non-agri-food and non-oil related inflation. Also, the impact of agri-food and oil related inflation was relatively short, but it greatly influenced the entire inflation, and the impact of non-agri-food and non-oil related inflation influenced the entire inflation for a long period. Research Implications - Policy makers consider that almost all grains depend on imports, except for rice; policies related to price level management should be prepared for the impact of food prices rising, and furthermore, international cooperation and coordination should be carried out at the same time.