Inflation erodes South Korean household purchasing power

Persistently high inflation kept real household income growth barely above zero in the first quarter, underscoring how rising living costs continue to chip away at consumers’ purchasing power.

According to the National Data Portal, average monthly household income stood at 5.481 million won in the January-March period, up 2.4% from a year earlier. Once inflation was factored in, however, real income growth slowed to just 0.4%.

On paper, households may appear to be earning more. In reality, surging prices for groceries, utilities and other essentials have absorbed nearly all of those gains, leaving purchasing power largely stagnant.

While incomes barely increased, household spending rose much faster as inflation gathered pace. Average monthly consumption expenditures climbed 5.3% from a year earlier in the first quarter. It was the first time in one year and nine months that spending growth outpaced income growth, dating back to the second quarter of 2024.

The increase reflected not more generous spending habits but the steep rise in food and everyday living costs. Inflation functions much like a regressive tax, hitting lower-income households hardest. Consumption spending among the bottom 20% income bracket jumped 7.3% from a year earlier, deepening financial deficits for vulnerable families.

Lower-income households, which already spend a greater share of their income on housing and basic necessities, have been particularly hard hit by soaring grocery and consumer prices.

The bigger concern is that inflationary pressures from both domestic and overseas factors are continuing to build, threatening to drive prices even higher in the months ahead.

On May 28, the Bank of Korea raised its forecast for this year’s consumer inflation rate to 2.7%, up 0.5 percentage point from its projection three months earlier. The economic fallout from the Iran war is pushing global oil prices higher, while the won-dollar exchange rate, now in the 1,500 won range, is fueling import costs.

Domestic producer prices rose 2.5% last month from the previous month, marking the sharpest increase since the Asian financial crisis 28 years ago. Those higher production costs are expected to feed into consumer prices after a lag of several months.

Large-scale bonus payouts by major conglomerates including Samsung Electronics are also expected to inject significant liquidity into the economy, potentially adding further inflationary pressure.

Citing mounting price pressures, the Bank of Korea on May 28 effectively signaled an interest rate hike later this year.

With inflation increasingly undermining the economy’s underlying strength, monetary policy focused on stabilizing prices now appears unavoidable. The government must also manage fiscal policy carefully to avoid stoking inflation further while moving quickly to shield vulnerable groups from rising living costs.

Households, businesses and policymakers alike will need to recognize that the high-cost environment is likely to persist for some time and work together to share the burden and strengthen the economy’s long-term resilience.