[High Inflation War]②Is Price Drop Real? Why It's Hard to Feel

Consumer Price Inflation Slows to 2%
Living Costs Remain High, Making It Hard for People to Feel Relief
Structural Factors Combine to Keep Living Costs Higher Compared to Other Countries

With the consumer price inflation rate dropping to 2.0% in August, there is an assessment that the era of high inflation, which has continued for three years since 2021, is coming to an end. However, the level of living costs closely related to our food, clothing, and housing remains high, and it is expected that the improvement in the perceived inflation felt by the public will proceed gradually.

According to Statistics Korea on the 9th, last month's consumer price inflation rate was 2.0% compared to the same period last year, the lowest in 3 years and 5 months since the 1.9% recorded in March 2021. The 2.0% inflation rate aligns with the Bank of Korea's price stability target, and based on this indicator alone, it can be interpreted that inflation has effectively entered a stabilization phase.

However, there is also an evaluation that there is some discrepancy from the perceived inflation felt by the majority of the public. This is because the so-called living cost inflation rate, which includes food, clothing, and housing prices, is higher than the overall inflation rate. In fact, the fresh food index in August rose 3.2% year-on-year, and agricultural, livestock, and fishery products increased by 2.4%, both higher than the overall average. Some items such as pears (120.3%) and apples (17.0%) still showed high price increases.

There is also a diagnosis that our living cost level is high compared to other countries, resulting in a heavy inflation burden on the public. According to the Bank of Korea's analysis, the prices of food, clothing, footwear, and housing in Korea are considerably higher than the average of the Organisation for Economic Co-operation and Development (OECD). Using the OECD average as 100 based on last year’s data, Korea’s food, clothing, and housing prices were about 55% higher. This is due to structural factors such as the low openness of these items and high transaction costs (distribution costs).

The Bank of Korea recently stated that during the period of rapid price increases, prices of essential consumer goods such as food rose more sharply than other products, and as a result, although the consumer price inflation rate is gradually slowing down, living costs remain at a high level.

Lee Jong-woong, Deputy Head of the Survey General Team at the Bank of Korea’s Research Department, emphasized, "Due to the high level of living costs, the perceived inflation felt by most economic agents may be higher than the official inflation rate," adding, "High living costs pose a greater burden especially on vulnerable groups such as low-income households and the elderly, who have a higher proportion of spending on food, clothing, and housing."

The continued sluggishness in domestic demand is also a factor increasing the public’s inflation burden. On the 8th, the Hyundai Research Institute analyzed in its Economic Weekly report that while exports are performing well, domestic demand remains weak, resulting in a polarization between export and domestic markets. It recommended lowering the base interest rate in October to stimulate consumption, investment, and domestic demand.

Joo Won, Head of Economic Research at Hyundai Research Institute, stated, "Due to high interest rates, consumer and investment sentiment has not fully revived, and real economic activity remains weak," and argued, "To secure a safety net role for the domestic sector, the Bank of Korea needs to shift to a policy of lowering the base interest rate."