Inflation Challenges for a Middle-Income Household

Prices are unstable now. If prices increase, you get less goods and services with the same amount of money. That explains why households are sensitive to inflation.

The Dong-A Ilbo analyzed the household budget of a middle class family in January 2007 to estimate how much money is needed in January 2008 to live exactly the same as the previous year. Mrs. A, 40, lives in Nowon-gu, Seoul, with her husband, a son in first grade, and a daughter in kindergarten. They earn a dual income and the combined household yearly income is about 90 million won pre-tax.

The Dong-A Ilbo team divided expenditures into six major categories, including food and dining, housing and communications, daily necessities and cultural activities, childcare and education, transportation, and others, and 83 subcategories. The team also analyzed the current prices of products Mrs. A bought by actually visiting discount retail stores or by phone.

Mrs. A spent 2,965,000 won (excluding investment in financial products and interest payment) last January, but she needs 3,249,000 won to maintain the same quality of life this year. In a year, real consumer prices have risen by 9.6 percent. Given the fact that the increased rate of consumer prices was 2.5 percent, real prices have risen more dramatically. Compared to the price hikes, their income rose only 0.8 percent from 7,758,000 won to 7,818,000 won.

Mrs. A buys food at discount retail store B near her home. Prices for vegetables rose dramatically over a one-year period.

The price of chili peppers per 100 gram rose by 76.5 percent from 850 won to 1,500 won. To buy the same amount of peppers worth 1,000 won last year, you must pay 1,760 won today. A kilo of green onions costs 5,300 won now compared with 4,000 won last year. The price of a cabbage skyrocketed 125 percent from 2,000 won to 4,500 won.

The price increase in flour products has also been remarkable. Mrs. A paid 4,640 for two bundles of five Ramen noodles last year. Now, she has to pay 5,140 won. When all food expenditures are combined, Mrs. A’s family must spend 5.9 percent more to enjoy the same meals they enjoyed a year ago.

Mrs. A said, “I was surprised to find the price of flour rose so much, when I bought flour powder last month. The prices of snacks remain the same, but their weights are lighter. Though reducing net weight can be counted as inflation, it was not included in this analysis.

The biggest part of expenditures last January was education fees for their two children. The family spent 1,007,000 won or 34 percent of their total expenditure.

The son is weak, so he learns swimming and Taekwondo, and goes to a private cram school. The fees for swimming lessons rose from 85,000 won to 90,000 won and for the cram school, the cost rose from 130,000 won to 150,000 won.

The daughter’s kindergarten tuition rose by 10 percent. In addition, she needs new clothes for a school event, as well as paper and crayons for class, which all cost a significant amount.

Gas prices are the most burdensome. Mrs. A, who goes to work by car, spent 280,000 won last January, but she now has to pay 344,000 won for the same distance this year.

The apartment maintenance fee rose from 224,000 to 257,000 won and her husband’s transportation fees rose from 40,000 won to 45,000 won.

Gold prices rose as well. A year ago, she bought a gold ring for her nephew’s first birthday for 84,000 won. Now, she needs 127,000 won to buy the same ring.

A year ago, she bought three children’s books about Chinese characters at 18,000 won, but she has to pay 26,000 won now. Inflation indices tend to be slightly exaggerated because people buy the cheapest items.

Mr. and Mrs. A said they feel like their worth is declining while everything else is getting more expensive. The household revenue remains the same, but prices are rising.

Mrs. A said she has not yet balanced the book for January this year, but she reduced or plans to reduce some spending.

She is considering making snacks at home because snacks and ice cream are expensive. She recently bought ingredients for making snacks and a sorbet machine.

She can reduce spending on food but she is helpless to rising oil prices. She often works outside, so she cannot give up driving her car.

“I should refrain from driving the car on weekends or I have to find cheap gas stations. Given the rising college tuition, I have to get my children education insurance,” she said.