Food and dining prices are rising simultaneously, increasing the burden on low-income households. The rate of increase in food expenditures for the lowest-income groups is more than double the average for all households, highlighting the impact of high inflation on vulnerable populations. Additionally, warnings have emerged that if demand-side price pressures grow due to strong semiconductor exports and domestic recovery, core inflation could rise significantly.
According to the National Data Portal (KOSIS) on August 30, the average monthly food expenditure for all households in the second quarter of this year was 891,000 won, a 3.3% increase compared to the same period last year. This includes 434,000 won for groceries and non-alcoholic beverages and 457,000 won for dining out.
Among income groups, the second quintile (20-40% income range) saw the largest increase in food spending, with an average monthly expenditure of 657,000 won, up 6.9% from a year ago. The first quintile increased by 6.1%, the fourth by 3.1%, the third by 2.0%, and the fifth by 1.8%. Lower-income households are experiencing a relatively larger increase in food spending.
Food expenditures accounted for 30.3% of total household spending in the first quintile and 27.2% in the second quintile. As lower-income households spend a higher proportion of their income on food, they are more significantly affected by rising prices.
Prices for key food items have surged notably. In the second quarter, prices for rice (up 13.2%), potatoes (11.1%), green onions (10.0%), and eggs (9.0%) saw significant increases. Rice has experienced double-digit growth for four consecutive quarters, while egg prices have risen due to reduced domestic supply from avian influenza.
Even relatively inexpensive dining options, such as tteokbokki (4.0%), triangle kimbap (4.0%), jjajangmyeon (3.9%), and haejangguk (3.8%), have seen price increases that exceed the overall consumer price inflation rate of 3.0%, further straining household budgets.
The concern is that rising food prices may coincide with upward pressure on core inflation. The Bank of Korea has analyzed that if strong semiconductor exports spread to domestic demand, the upward trend in core inflation could intensify. If the core inflation rate exceeds the mid-2% range, price increases that were previously limited to specific items could become widespread.
The Bank of Korea's Price Trends Team released a report on August 30, stating that as demand pressures increase, domestic core inflation is expected to remain elevated. The Bank noted that there have been four instances of simultaneous demand-driven inflation and rising core prices since 2000: before the card crisis in 2002, just before the global financial crisis in 2007-2008, during the recovery from the financial crisis in 2011, and during the recovery from the pandemic shock in 2022-2024.
During these periods, improvements in household purchasing power led to increased consumption and rising prices. As demand recovers, companies have also been observed passing on cost increases to prices. Notably, when the core inflation rate exceeds the mid-2% range, the correlation between prices of individual items tends to strengthen significantly.
The impact of demand pressures on core inflation is also considerable. In a high-demand phase, a 1 percentage point increase in the GDP gap is associated with a 0.1% to 0.4% increase in the core inflation rate. The cumulative effect of demand shocks on core inflation can reach up to 0.6 percentage points in high-demand phases.
Improved trade conditions due to strong semiconductor exports also present a variable. If increased purchasing power from real gross domestic income (GDI) leads to expanded consumption, it could exert an additional upward pressure of 0.05% to 0.2% on core inflation, according to the Bank of Korea. However, if income increases are directed toward savings or asset acquisition, the inflationary pass-through effect may be limited.
Song Byeong-ho, head of the Bank of Korea's Price Trends Team, stated, "The current situation shares many similarities with past instances of demand-driven core inflation." He added, "There were signs of cost shocks in the first half of the year, and we are observing a gradual expansion of demand pressures."
The Bank of Korea emphasized the need to closely monitor the speed and intensity with which income increases from improved trade conditions translate into consumption when assessing future inflation trends. It is crucial to ensure that rising core inflation does not become entrenched across a wide range of items.
* This article has been translated by AI.
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