Over the past five years, the prices of processed foods have risen, causing living costs to surge by more than 19%. The price level significantly exceeded the average of the Organization for Economic Cooperation and Development (OECD). This is due to overlapping domestic and external supply shocks from the coronavirus disease (COVID-19) pandemic and the Russia-Ukraine war.

On the 18th, the Bank of Korea presented a report titled ‘Assessment of recent trends and levels in living costs, including processed foods’ during a press briefing on 'the operation status of the inflation target.' Researchers such as Lee Seung-ho, Jang Tae-yun, Kim Sang-ho, and Wi Seung-hyun from the Bank of Korea's Economic Statistics Department participated in the report's preparation.

Citizens are shopping at a large supermarket. /Courtesy of News1

According to researchers, living costs have shown a higher rate of increase compared to consumer prices since the pandemic, raising the price level. This is attributed to supply shocks that occurred during the pandemic, such as supply chain disruptions, the Russia-Ukraine war, and worsening weather conditions, which significantly increased the prices of food and energy, accounting for 32.4% of living costs.

As a result, the cumulative increase in living costs from the start of high inflation in 2021 to May this year was 19.1%, which is 3.2 percentage points higher than consumer prices (15.9%). However, in the latter half of last year, thanks to the decline in agricultural product prices and international oil prices, the gap between living costs and consumer prices narrowed, but this gap is expanding again this year due to rising processed food prices.

When comparing Korea's price level with that of the OECD, it is evident that the price levels of essential goods such as clothing, food, and housing are high. Specifically, as of 2023, Korea's price levels for clothing (161), food (156), and housing (123) significantly exceed the OECD average of 100. In particular, the price levels for fruits, vegetables, and meat are more than 1.5 times the OECD average, and prices for processed foods like bread and oils are also relatively high.

In particular, the prices of processed foods and personal services have shown a high upward trend of over 3% for a while, driving up overall prices. Consequently, the contribution of these prices to the overall consumer price increase has gradually expanded, accounting for 74.9% of the total increase last month.

The rise in living costs has acted as a factor increasing the burden on households. Since 2021, households' nominal purchasing power (earned income) has not increased sufficiently to offset the inflation rate. In fact, from 2021 to the first quarter of this year, the average increase rate of real purchasing power was 2.2%, which is considerably lower compared to the pre-pandemic period (2012-2019, 3.4%).

The rise in essential goods prices has negatively impacted consumer expenditure. According to a survey conducted by the Bank of Korea last month, among respondents who did not increase their consumption expenditure from January to April this year, 62% cited reduced purchasing power due to price increases as the main reason.

Researchers expressed concern that if the rise in living costs accumulates, it could deepen inflation inequalities among income levels, further increasing the burden of living expenses on vulnerable groups. Low-income households have a large proportion of essential goods, such as food and housing, in their consumption baskets.

Moreover, the phenomenon of 'cheapflation,' where prices of low-cost products rise more significantly even within the same category, has been evaluated as further deepening perceived inflation inequality. Since low-income households already have a high expenditure share on low-cost products, they are particularly affected as it becomes difficult to substitute when prices of these products rise.

Researchers noted, “The situation where the living cost increase leads to high perceived prices for households influences household expectations of inflation, which could hinder price stability in the medium to long term.” They emphasized that it is essential to promote competition among corporations through deregulation and reducing entry barriers, while also diversifying material and supply import sources to mitigate the extent to which shocks in specific items spread to other items.

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