In May, the most noticeable expense for 40-something office worker Kim was fuel costs. Traveling every weekend between his children's academy and his parents' home, Kim felt that the burden of filling up his tank had significantly increased. The cost of summer vacation flights also posed a challenge. While planning a family trip, he found that airfare and accommodation prices had risen more than expected, leading him to consider scaling back or postponing his plans.
The financial strain felt by middle-class households like Kim's was reflected in last month's inflation data. According to the National Data Agency, the consumer price index rose 3.1% in May compared to the same month last year, marking the highest level in 26 months since March 2024. Fuel prices surged by 24.2%, and international airfare increased by 33.5%. The living cost index also rose by 3.3%, outpacing the overall inflation rate.
The root cause of rising prices can be traced back to the prolonged conflict in the Middle East, which has driven up oil prices. The increase in fuel costs has not only affected gasoline and diesel but has also translated into higher transportation and travel expenses. For Kim, this means increased costs for commuting and family travel, alongside rising expenses for vacations and leisure activities. The inflation is spreading beyond grocery bills to encompass overall travel and leisure spending.
Despite soaring prices, consumer sentiment rebounded in May, contrary to initial concerns. The Bank of Korea's consumer trend survey indicated that the Consumer Sentiment Index (CSI) rose by 6.9 points to 106.1 compared to the previous month. The Current Living Conditions Index (CSI) increased by 2 points to 93, while the Future Living Conditions Index rose by 5 points to 97. The Current Economic Conditions Index and Future Economic Outlook Index also saw increases of 15 points and 14 points, reaching 83 and 93, respectively.
However, this improvement in sentiment does not necessarily translate to increased spending. Kim's choices have become more cautious. Although he feels optimistic about the economic outlook, rising fuel and airfare costs make it difficult to simultaneously increase spending on dining out, travel, and durable goods. In fact, while the Consumer Spending Outlook Index rose by 2 points to 110, the increase in spending may be more a result of unavoidable costs due to price hikes rather than active consumer spending.
Concerns about inflation remain prevalent. Over the past year, consumer perception of the inflation rate has risen to 3.0%, up 0.1 percentage points from the previous month. The expected inflation rate for the next year is 2.8%, down 0.1 percentage points, but still hovering in the upper 2% range. Consumers are balancing expectations of economic improvement with worries that the burden of living expenses will not ease easily.
The challenge is that the upward trend in prices is likely to continue for the foreseeable future. The Bank of Korea recently projected that the consumer price inflation rate will remain around 3% for some time.
Lee Ji-ho, head of the Bank of Korea's research department, stated, "The inflation rate in June is expected to be similar to that of May, as the rise in fuel prices continues at a high level. The increase in consumer prices in May was driven by a significant rise in fuel prices and higher service costs related to travel, such as domestic and international airfare, which expanded the overall increase compared to April."
Ultimately, May's household economy can be characterized as a month of conflicting sentiments of 'psychological recovery' and 'perceived burden.' While consumer sentiment indicators showed a rebound, the shock from rising oil prices from the Middle East has constrained actual spending choices for middle-class households through increased fuel, airfare, and accommodation costs. Even if expectations for economic recovery improve, if inflation remains around 3%, it is likely that the pace of consumer recovery will struggle to gain momentum.
* This article has been translated by AI.
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