Hidden Inflationary Pressures Behind '2% Range Prices'... Rental Market and Strong Exchange Rate as Key Variables

While the consumer price inflation rate has stabilized in the low 2% range, some experts warn that the risk of further price increases still remains. Analysts point out that the recent surge in jeonse and monthly rent prices following the government's real estate measures, as well as the prolonged burden of a strong dollar, could act as variables that stimulate overall living costs.

According to the National Data Agency on November 3, the living cost index, which includes jeonse and monthly rents, stood at 117.91 (2020=100) as of September, up 2.3% from the same month last year. This represents a 0.9 percentage point increase in just one month compared to August’s 1.4%. During the same period, the living cost inflation rate excluding jeonse and monthly rents was 2.1%, up 0.4 percentage points from the previous month’s 1.7%, indicating a steeper increase when rent is included.

The jeonse and monthly rent market has become volatile again due to a slowdown in transactions caused by the government’s successive real estate regulations. According to KB Real Estate, the monthly rent for apartments in Seoul rose by 7.15% from January to October this year, more than triple the recent consumer price inflation rate. This is attributed to the rebound in apartment prices in some areas of the Seoul metropolitan area, which has driven up both monthly and jeonse rents.

The problem is that if the rise in jeonse and monthly rents becomes prolonged, it could spread to overall consumer prices through housing-related service costs. Kang Sungjin, a professor of economics at Korea University, warned in a phone call, “A prolonged increase in jeonse and monthly rents could affect the overall perceived inflation experienced by consumers.” According to OECD statistics, the weight of rental costs (jeonse and monthly rent) in Korea’s consumer price index is around 10%, but if the housing costs for owner-occupied homes are included, the actual burden on households could be much higher.

Another variable influencing inflation is the high exchange rate. Recently, the won-dollar exchange rate has fluctuated around the 1,430-won level. This directly drives up the prices of imported raw materials and processed foods. Looking at the detailed items in September’s consumer price index, processed food prices rose 4.2% year-on-year, pushing up the overall inflation rate by 0.36 percentage points. The increase was especially pronounced for daily necessities such as bread (6.5%) and coffee (15.6%). The Bank of Korea’s Economic Research Institute recently reported to the Cabinet that while Korea’s overall price level is similar to the OECD average, food prices are 1.5 times higher.

According to the export-import price index released by the Bank of Korea, import prices in August were 135.21 (2020=100), up 0.3% from the previous month. This marked the second consecutive month of increase since July, as rising won-dollar exchange rates pushed up import prices despite falling international oil prices. As a result, food companies with significant overseas sales are facing increased pressure to raise product prices, with average operating margins falling below 5%.

The political opposition has also raised concerns about inflation. Kim Doup, Policy Committee Chairman of the People Power Party, stated, “The execution of 13 trillion won worth of consumption coupons stimulated inflation rather than supporting livelihoods,” and added, “The sudden influx of money into the market has driven up the prices of rice, food, energy, and even jeonse and monthly rents.” He further noted, “If this situation continues, there could be signs of stagflation, where inflation and economic stagnation occur simultaneously.”