The Bank of Korea's analysis has revealed a phenomenon called 'cheapflation,' in which the prices of cheaper goods have risen more sharply since the COVID-19 pandemic. This has exacerbated inflation inequality as the burden on vulnerable groups has relatively increased.
On the 18th, the Bank of Korea published an issue note titled 'Cheapflation and Inflation Inequality Post-Pandemic.' The report was authored by Vice Administrator Jo Gang-cheol and researcher Wi Seung-hyeon from the Price Trend Team of the Research Department.
The authors used the 'processed food scanner price index,' which extracts processed food sales data from the 'scanner data' of the Korea Chamber of Commerce and Industry, for their analysis. The scanner data includes the sales amount and quantity for each product barcode, showing trends similar to the consumer price index (CPI) for processed food prices, thus making it suitable for micro-analysis according to the authors.
As a result of calculating the scanner price index by price quintile, it was found that the prices of low-cost goods in Korea have risen more sharply post-pandemic. Price quintiles were divided from the 1st quintile (low-cost) to the 4th quintile (high-cost) based on the average prices of items in 2019. For example, sausage products were classified by store and product, with the cheapest product placed in the 1st quintile and the most expensive in the 4th quintile.
Calculating the cumulative inflation rate from January 2020 to September 2023 by price quintile, the inflation rate for 1st quintile low-cost goods was 16.4%, whereas it was only 5.6% for 4th quintile high-cost goods. Looking at the year-on-year inflation rate, the gap between quintiles was minimal before the pandemic but significantly widened as inflation spiked afterward, especially between low-cost and high-cost goods.
The authors identified the sharp rise in import raw material prices (supply factors) and the shift to cheaper goods (demand factors) as causes of cheapflation. On the supply side, the sharp increase in import raw material prices post-pandemic likely resulted in a higher inflation rate for low-cost goods. This was due to the significant rise in domestic supply prices of imported manufacturing raw materials, attributed to events like the Russia-Ukraine war.
Demand shifting towards cheaper goods also contributed to cheapflation. Generally, households tend to buy products that are similar but cheaper than what they previously consumed to reduce the burden of decreased real income during high-inflation periods. Indeed, sales of 1st quintile low-cost goods have increased since the pandemic, while the sales share of 4th quintile high-cost goods has declined.
The authors noted that cheapflation has widened the gap in effective prices (real average prices) among income groups, deepening inflation inequality. Based on the scanner price index data, the authors estimated that the cumulative inflation rate for the bottom 20% low-income group was 13% from Q4 2019 to Q3 2023, 1.3 percentage points higher than the 11.7% for the top 20% high-income group.
The authors said, "Cheapflation, which affects low-income households more severely, tends to appear during periods of price spikes," stating that "maintaining an overall price stability trend through monetary policy is the way to relieve the difficulties of low-income households."
Furthermore, "From the policy perspective, it is necessary to focus on stabilizing the prices of medium- and low-cost goods during high inflation periods to alleviate the burden on vulnerable groups," they said, advising that "considering measures such as duty-free allocations to cushion overseas supply shocks and selective support for medium- and low-cost goods during price hike discounts could be explored."