The Two Faces of 'COVID-19 Inflation'.. Why Doesn't the Low Inflation Feel Real?

Statistics Korea Announces March Consumer Price Trends
Demand for 'Jip Bap' Increases, Causing Sharp Rise in Vegetable and Livestock Prices
Perceived Inflation Soars Despite Low Inflation Rate Around 1%

[Sejong=Asia Economy Reporters Kim Hyun-jung, Joo Sang-don, Lee Seon-ae] Due to the impact of the novel coronavirus disease (COVID-19), the consumer price inflation rate has remained in the 1% range for three consecutive months, and the core inflation rate based on the Organization for Economic Cooperation and Development (OECD) standards recorded the lowest increase in over 20 years since the foreign exchange crisis. However, it seems difficult for actual consumers to feel this low inflation. While factors such as the decline in international oil prices and the reduction of individual consumption tax on passenger cars have limited the numerical inflation rate, items like pork and eggs, whose prices have surged due to a sharp increase in demand, are still found in shopping baskets. As the unprecedented COVID-19 situation prolongs, the gap between inflation figures and the perceived inflation temperature is expected to widen further.

According to the 'March Consumer Price Trends' released by Statistics Korea on the 2nd, the consumer price index last month was 105.54 (2015=100), rising 1.0% compared to the same month last year, marking a 1% range increase for the third consecutive month. Although this is an increase compared to last year's annual rise of 0.4%, it can be seen as a continuation of a low inflation atmosphere.

The 'index excluding agricultural products and petroleum,' which excludes seasonal factors or temporary shocks to show the underlying inflation trend, rose 0.7% compared to the same month last year. The 'core inflation index excluding food and energy,' which excludes food and energy-related items, increased by only 0.4% compared to the same month last year. This is the lowest increase since December 1999 (0.1%), at the end of the International Monetary Fund (IMF) foreign exchange crisis. This is also the background for some to mention the risk of 'deflation,' where economic recession and price decline occur simultaneously.

Last month, the service price inflation rate was 0.5%, the second-lowest level following February's 0.4%, which was the lowest since December 1999 (0.1%). Despite many price-increasing factors in the early year for dining out, the price rose by only 0.9%. Hotel accommodation fees fell by 5.2%, the lowest since August 2010 (-9.4%), and condo usage fees also dropped by 3.1%.

However, the perceived inflation shows a different pattern from these numbers. Above all, the prices of food ingredients have jumped significantly. Fresh food prices such as vegetables (16.6%) and fishery products (8.4%) increased, and prices of livestock products and processed foods also rose by 6.7% and 1.7%, respectively. Looking at individual items, everyday food ingredients such as pork (9.9%), eggs (20.3%), napa cabbage (96.9%), onions (70.6%), and pumpkins (58.1%) led the upward trend. The cause is attributed to COVID-19. Ahn Hyung-jun, Economic Trend Statistics Officer at Statistics Korea, explained, "Due to changes in consumption patterns caused by COVID-19, people refrained from going out, increasing demand for food ingredients consumed at home, which raised prices." According to a recent survey by CJ CheilJedang of 1,000 consumers on changes in food consumption trends, the proportion of people eating home-cooked meals was 83%, an increase of 23.5 percentage points compared to last year. Changes are also detected in retail sales. Last month, Lotte Super's sales of ready meals rose by 44.5%, and noodles, snacks, and canned foods increased by 32.8% and 30.4%, respectively. Professor Kang Sung-jin of Korea University’s Department of Economics commented, "The 1% inflation rate is largely influenced by the base effect, so the perceived inflation rate felt by the public is likely higher," adding, "Even if dining out decreases and total food expenses decline, if the individual prices of foods directly purchased by consumers rise, the gap between figures and perception inevitably widens."

Statistics Korea expects that inflation will not reach a negative growth rate due to inflation and last year's base effect, but there is a high possibility of further decline as the COVID-19 situation is reflected with a lag. Officer Ahn said, "Since last year's inflation was very low, it seems difficult to record a negative rate," but added, "With the reflection of free education policies, school meal fees, and tuition fees delayed due to postponed school openings in April, and the usual 3-4 week lag for international prices such as petroleum prices to appear domestically, there is a possibility of additional decline."

Meanwhile, the price of masks, which surged due to the explosive demand caused by COVID-19, has stabilized downward following the government's public mask policy. Mask products, which were priced in the 5,000 won range online and 2,000 won range offline (including pharmacies and marts) in February, dropped to the 4,000 won range and 1,800 won range, respectively, last month. Especially, looking only at pharmacies, the price was about 1,600 won, similar to the public mask supply price (about 1,500 won).

This content was produced with the assistance of AI translation services.