Korea's consumer and business sentiment sours to pandemic levels on runaway inflation

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Korean consumer and business sentiment returned to pandemic levels with expectations for the inflation rate in the following year nearing 4 percent, the strongest in a decade to add more pressure on authorities to tame inflation before strong prices turn lengthy and structurally weaken the economy.

According to Consumer Survey for June released by the Bank of Korea (BOK) on Wednesday, consumers’ expected inflation – which measures prices in the following year - reached 3.9 percent, up 0.6 percentage point from 3.3 percent in May. The reading marks the highest since 3.9 percent in April 2012 in the steepest on-year gain since the central bank began compiling related data in 2008.

The survey was conducted on 2,500 households between June 13 and 20.

The strong prices – with the headline consumer price index gaining 5.4 percent in May and being warned to hit above 6 percent in following months – have affected the consumer sentiment for persistently high prices, the central bank observed.

Korea’s expected inflation rate topping 4 percent could be a harbinger for a crisis. It last exceeded 4 percent for a year from July 2008 before the Wall Street meltdown and again for a year from March 2011 in the wake of Japanese reactor crisis from monstrous earthquake and European fiscal woes.

What’s more worrisome is the pace of buildup due to galloping inflation and interest rate hikes in the U.S., the BOK added.

Consumers’ perceived inflation over the past one year reached 4.0 percent, up 0.6 percentage point from a year ago, and the strongest since 2013.

Expectations for higher interest rates also came to a record 149 in June, up 3 points against 146 in May. A reading above 100 means that more anticipate interest rates to go up higher from current levels in six-month time.

The BOK has accelerated rate increases in recent months to put the base rate at 1.75 percent in May – compared with 0.5 percent a year ago - and is expected to expand the hike scope to 50 basis points if the June inflation data exceeds 6 percent.

Expectations for housing price rise, on the other hand, fell 13 points from a month ago to 98, amid sluggish housing trade from rising interest rates.

The composite consumer sentiment index (CCSI) fell 6.2 points to 96.4 in June from 102.6 in May, falling below 100 for the first time since 97.2 in February 2021. A reading below 100 means that people are more pessimistic than optimistic about the economy.

All of the six major indicators that make up the CCSI sank from a month ago in June, with the index for prospective domestic economic conditions sliding 15 points to 69, current domestic economic conditions 14 points to 60, prospective living standards 5 points to 88, current living standards 2 points to 87, prospective household spending 2 points to 114, and prospective household income 1 point to 97.

Along with consumer sentiment, business confidence has soured, sliding to an 18-month low for July due to multiple challenges of high inflation, the unfavorable foreign exchange rate, and interest rate hikes, according to compiling by the Federation of Korean Industries (FKI) Wednesday.

A survey of top 600 Korean companies by revenue showed that the Business Survey Index (BSI) forecast for July reached 92.6, the lowest since 91.7 in January, 2021 and the fourth straight month to remain below 100.

A reading above 100 means there are more businesses that are optimistic about the economy than pessimistic and vice versa for below 100.

The readings for both manufacturing industry and non-manufacturing industries remained below 100 at 90.4 and 95.1, respectively. The BSI for the manufacturing industry continued to be below 100 for a fourth straight month. The non-mental materials and products sector registered 57.1 and textile and clothing 63.6. Electricity, gas, and water reading also reached 78.6 due to seasonal factors.

The only index that stayed above 100 for July was employment (103.9). The indices for inventory, investment, exports, financial condition, payability, and domestic demand were in negative territory, survey showed.

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