South Korea is facing a cost of living crisis as the prices of basic necessities are rising faster than consumer prices. A sharp rise in food and energy prices is driving this trend. Experts note that persisting inflationary pressures will affect the Bank of Korea’s monetary policy this year.
The country’s cost of living index rose higher than the consumer price index (CPI) last year in all but four months from April to July 2023, according to Statistics Korea on Jan. 25. In particular, food, electricity, and utility costs have consistently outpaced consumer price inflation over the past year. Food prices increased 5% last year, and electricity and gas prices soared 20% each through September.
While developed nations have also struggled with inflation in the past year, the cost of living prices is increasing at a slower rate than consumer prices in many countries. In the United States, food inflation fell below headline inflation last September.
Developed nations like the U.S. have been able to keep prices of necessities such as food and energy from shooting up by importing food. The U.S., a major agricultural exporter, imported more agricultural products than it exported last year, which helped keep food prices relatively low.
Additionally, changes in international oil prices directly impact utility bills, with countries like the U.S. swiftly adjusting domestic energy prices in response to global oil price movements. In 2022, inflation spiked in the wake of the Covid-19 pandemic but quickly stabilized as oil prices fell.
This isn’t the case in Korea. The country’s agricultural market is open, but specific government regulations, such as the Sanitary and Quarantine Measures for Animals and Plants (SPS ), have made importing items like apples nearly impossible. Eleven countries, including the U.S., Germany, and Japan, have tried to export apples to Korea, but none have been accepted.
Utility prices are slow to reflect international oil prices as the government controls energy inflation. During the oil price spike, the government capped electricity and gas price rises and extended the fuel tax cut. While these measures initially prevented a sharp increase in consumer prices in 2022, they have contributed to Korea’s headline inflation falling at a slower rate than many developed nations as the accumulated energy costs have been gradually passed on to consumers.
Experts suggest that to mitigate the long-term volatility of living costs, Korea needs to adopt flexible food import policies and adjust utility prices to reflect fluctuations in international oil prices.
Korea’s central bank, which has been working on managing inflation to reach its 2% goal, has expressed concern about inflationary pressures related to the cost of living.
BOK Governor Rhee Chang-yong also highlighted the underlying issues contributing to these challenges. “Korea imports very little food, so when domestic conditions change, food prices are bound to fluctuate, and the overall (price) level is high,” he said in a recent press conference. “If the government starts importing food to solve this structural problem, it would lead to other complications, such as opposition from local farmers.”
