'New normal' exchange rate drives up prices

The exchange rate in the mid-1,400 won range per U.S. dollar has become the "new normal," driving up prices. Last month, petroleum product prices, including gasoline and diesel, rose 6.3% compared to a year earlier. This increase occurred despite little change in global oil prices from February last year. The main culprit was the exchange rate, which surged by more than 100 won. Last month's average won-dollar exchange rate was 1,445.6 won (based on the 3:30 p.m. closing price), up 114.2 won from a year earlier. Since the declaration of martial law in December, the monthly average exchange rate has fluctuated between 1,436 and 1,455 won.

Rising material costs, combined with a soaring exchange rate, have led food companies to raise prices. From March 17, Nongshim will increase the price of a pack of Shin Ramyun by 50 won to 1,000 won. The price of Shrimp Crackers will also rise by 100 won to 1,500 won. CJ CheilJedang raised the price of Spam sold in large supermarkets by 9.8% this month, along with some sausage and dumpling products. Paris Baguette, a bakery brand under SPC Group, increased the price of some products, including Soboro bread, by an average of 5.9% last month.

Not all of the impact of the exchange rate on inflation has been reflected yet. The Bank of Korea reported last month that the effect of exchange rate fluctuations on consumer prices peaks nine months after the initial change before gradually declining. The report also found that the long-term impact on inflation is even greater when the exchange rate rises significantly and remains high for more than three months. If the high exchange rate persists, more companies are likely to raise prices, amplifying its effect on inflation.

The government has called on businesses to refrain from raising prices, but its influence has waned. Since mid-February, the minister and vice minister of Agriculture, Food and Rural Affairs have met with food and restaurant companies, urging them to minimize price increases. However, the list of processed foods with rising prices continues to grow. Some critics argue that companies are taking advantage of the government's weakened control amid the political turmoil following the declaration of martial law and impeachment proceedings. A similar trend was observed in 2017 when food companies rushed to raise prices during the impeachment of former President Park Geun-hye.

The current situation contrasts sharply with that of 20 months ago. At that time, the government pointed out that falling wheat prices justified a reduction in ramen prices, prompting companies to lower them for the first time in 13 years. Although wheat prices had fallen, the won-dollar exchange rate still hovered around 1,300 won, a higher level than the previous year. Last month, the average international price of wheat was $212 per ton (SRW basis), lower than the $249 recorded in July 2023. While companies cite rising exchange rates and material costs as reasons for the latest ramen price hikes, not all raw material costs have increased.

Rising food prices place a heavier burden on low-income households, which spend a larger portion of their income on food. In the fourth quarter of last year, the lowest-income households (bottom 20%) spent 45% of their disposable income on food. In contrast, the highest-income households (top 20%) allocated only 15% of their income to food expenses. With price control efforts proving ineffective, the government must find practical ways to ease the financial burden on low-income families. People struggling to afford meals should not be left unable to buy even a pack of ramen.