🚨 Analysis of Price Perception Polarization and Continued Upward Pressure

Today Korean Economic News | 2025.02.28

📌 "Everything Has Increased in Price" ... Price Perception Polarization Worsens

💬 Consumer prices rose 2.2% compared to a year ago, exceeding government expectations. As uncertainties grow with high oil prices, high exchange rates, and the U.S. new administration's tariff policies, the likelihood of continued price increases has grown. In particular, polarization is intensifying as lower-income groups experience a higher perceived inflation rate.

1️⃣ Easy Understanding

Prices in our country are rising again. Many people feel that "while statistics show prices have only risen a little, in reality, everything has increased a lot." I'll explain in simple terms why this price increase is occurring and why the degree of perception differs from person to person.

According to price statistics, last month's consumer prices rose 2.2% compared to a year ago. This is higher than the government's initial forecast of 2.0%. There are several reasons for rising prices. International oil prices have risen, and the Korean won's value has fallen (exchange rate increase), causing imported goods prices to rise. Additionally, the tariffs on imported goods announced by the Trump administration in the U.S. could also act as a factor in future price increases.

However, the actual inflation rate we feel is often much higher than official statistics. Why is that?

First, it's because the prices of essentials and food items we frequently purchase have risen more than the average. For example, last month, agricultural and livestock product prices rose by an average of 3.5%, and dining-out prices increased by 3.1%. When the prices of daily food items and frequently used services rise more significantly, perceived inflation inevitably becomes higher.

Second, there's a hidden price increase called 'shrinkflation.' Shrinkflation is a method of keeping the product's price the same or increasing it only slightly while reducing the quantity of contents. For example, when a snack bag has the same size, but the number of snacks inside has decreased. Such cases aren't accurately reflected in official price statistics, but consumers perceive them as actual price increases.

Third, perceived inflation differs due to different consumption patterns according to income levels. Lower-income groups spend a larger portion of their income on essentials such as food, housing, and energy. When the prices of these essentials rise relatively more, lower-income groups perceive a higher inflation rate. On the other hand, higher-income groups spend on various consumption items and have the capacity to substitute certain products if their prices rise, potentially experiencing a relatively lower perceived inflation.

The Producer Price Index (PPI) also needs attention. This is an indicator that shows changes in costs for businesses to produce goods. Recently, the producer price rose by 3.0%, meaning that production costs for businesses are increasing. Typically, producer price increases are transferred to consumer prices with a time lag, so consumer price increase pressure may become stronger in the future.

Ultimately, consumers' feeling that "everything has increased in price" stems from actual price increases, along with price hikes centered on essentials and food, hidden price increases like shrinkflation, and differences in consumption patterns by income. In particular, lower-income groups feel a greater burden from price increases due to their higher proportion of essential spending, intensifying the polarization of price perception between income classes.

2️⃣ Economic Terms

📕 Consumer Price Index (CPI)

The Consumer Price Index is an indicator that measures price changes in goods and services purchased by households.

• It indexes price changes over time, setting a certain base period as 100.
• It is calculated by weighted averaging of price changes for various items such as food, housing, clothing, transportation, healthcare, and education.

📕 Producer Price Index (PPI)

The Producer Price Index shows price changes in goods and services traded between businesses.

• It measures price changes at different production stages, including raw materials, intermediate goods, and final goods.
• Generally, changes in producer prices affect consumer prices with a time lag.

📕 Shrinkflation

Shrinkflation refers to hidden price increases where product size remains the same but the amount of contents is reduced.

• It is a compound of 'shrink' and 'inflation', a pricing strategy that is difficult for consumers to recognize.
• It is difficult to fully reflect in official price statistics, becoming a factor that widens the gap between perceived inflation and statistics.

📕 Price Perception

Price perception is the degree of price increase actually felt by individuals, which varies according to income and consumption patterns.

• There is a tendency to react more sensitively to price changes of frequently purchased items.
• Lower-income groups have a higher proportion of essential spending on food and housing, resulting in higher perceived inflation when essential prices rise.

3️⃣ Principles and Economic Outlook

💡 Structural Causes of Price Increases and Their Sustainability

• Recent price increases are the result of various domestic and international factors working together, requiring analysis of future sustainability.

  • First, international energy price increases and raw material price fluctuations are important factors. International oil prices have risen by more than 10% over the past six months, and there is additional upward pressure due to heightened geopolitical tensions in the Middle East region. As petroleum products affect the overall economy including transportation, production, and heating, oil price increases lead to widespread price increases. Additionally, agricultural product prices are experiencing increased volatility due to climate change and supply chain issues. In particular, price increases in major agricultural products such as grains, coffee, and cocoa are directly affecting food prices.

  • Second, the effect of import price increases due to won weakness is appearing. As the won/dollar exchange rate rises due to the U.S. high interest rate policy and preference for safe assets, the won-denominated prices of imported raw materials and finished products are increasing. Especially, Korea has a high dependence on imported energy and food, making it highly sensitive to exchange rate fluctuations. Over the past six months, the won's value has fallen by about 5% against the dollar, and this exchange rate effect is being reflected in consumer prices with a time lag.

  • Third, labor cost increases and service price pressures are becoming structural. As labor costs rise due to minimum wage increases and structural changes in the labor market, price increase pressures are growing, especially in labor-intensive service industries. Service prices such as dining out (3.1%) and personal services (2.8%) are exceeding the overall inflation rate (2.2%), with larger price increases in industries with higher labor cost proportions. Service prices have a rigidity that makes them difficult to fall once they rise, becoming a factor hampering overall price stability.

  • Fourth, the U.S. new administration's tariff policy is acting as a new uncertainty factor. If the wide-ranging tariffs on imported goods announced by the Trump administration become reality, they could act as cost increase pressures across global supply chains. In particular, high tariffs on Chinese products are likely to lead to price increases in consumer goods and intermediate goods imported from China. Additionally, intensified trade conflicts due to tariffs can increase global uncertainty, expanding raw material price volatility and aggravating price increase pressures.

• Considering these factors comprehensively, short-term price increase pressures are likely to persist. In particular, with the Producer Price Index (PPI) showing a higher increase rate of 3.0% compared to the Consumer Price Index (CPI), there remains room for businesses' cost burdens to be passed on to consumer prices in the future. However, the Bank of Korea's tight monetary policy and the possibility of global economic slowdown are expected to act as factors limiting price increases to some extent.

💡 Differences in Price Perception by Income Class and Intensification of Polarization

• Price increases do not affect all classes equally, and there are significant differences in perceived inflation according to income levels.

  • First, differences in consumption patterns are the main cause of the gap in perceived inflation. Lower-income groups spend a considerable portion of their income on essentials such as food, housing, and energy, while higher-income groups tend to spend on various items such as education, culture, and leisure. Recent price increases are centered on essentials such as food (3.5%), housing (2.8%), and energy (2.6%), resulting in higher perceived inflation for lower-income groups. According to analysis by the Korea Development Institute (KDI), the perceived inflation rate for the bottom 20% of income is estimated to be about 0.7 percentage points higher than official statistics, while the top 20% is 0.2 percentage points lower.

  • Second, there are also differences in the possibility and flexibility of substitute consumption. Higher-income groups can shift their consumption to substitute goods when the price of a specific product rises, but lower-income groups are already consuming centered on minimal essentials, so their substitution possibilities are limited. For example, when food prices rise, higher-income groups can switch to alternative foods, but lower-income groups are already choosing the cheapest options, making additional adjustments difficult. Due to this, the actual burden felt by lower-income groups in the same inflation environment appears greater.

  • Third, the impact of hidden price increases such as shrinkflation also appears differently by class. Shrinkflation, which maintains product prices while reducing content amount, is a form of price increase that is difficult to fully reflect in official price statistics. Recently, cases of shrinkflation have been increasing in foods, household goods, and processed foods, and many of these products are essentials frequently purchased by lower-income groups. According to a survey by the Korea Consumer Agency, about 38% of 100 major essential items implemented shrinkflation over the past year, with content amounts decreasing by an average of 7%.

  • Fourth, differences in income growth rates are also amplifying the burden of perceived inflation. Due to recent economic slowdowns, income growth rates for lower-income groups are below inflation rates, while higher-income groups tend to maintain real income through asset income and stable wage increases. This causes lower-income groups to perceive a greater decline in real purchasing power due to price increases. According to Statistics Korea data, the real income of the bottom 20% of income decreased by 0.5% over the past year, while the top 20% increased by 1.2%.

• As these factors work together, there is a considerable gap in the perceived inflation burden and actual living standards by income class in the same price increase environment. This acts as a factor intensifying economic inequality and polarization, becoming an important policy task that can hinder social integration and sustainable economic growth.

💡 Spread of Shrinkflation and Its Impact on Consumer Perceived Inflation

• 'Shrinkflation' is receiving attention as one of the main factors widening the gap between official price statistics and consumer perception recently.

  • First, it is necessary to examine the concept and spread status of shrinkflation. Shrinkflation refers to a hidden price increase method where the price of a product is maintained or slightly increased while reducing the content amount or size. From a business perspective, it is a strategy with less consumer resistance than explicit price increases and can alleviate cost increase burdens. Recently, shrinkflation has been confirmed in various fields such as food, beverages, household goods, and cosmetics. According to monitoring by the Korea Consumer Agency, snacks decreased by an average of 8%, beverages by 5%, and household goods by 6% in content amount. In particular, products where consumers find it difficult to recognize size or weight changes tend to utilize shrinkflation more actively.

  • Second, there are methods and limitations in how shrinkflation is reflected in official price statistics. The Consumer Price Index calculated by Statistics Korea is measured based on product price changes, and while adjustments are made according to content amount changes, it is difficult to identify all products in real-time. Especially when product packaging or design changes together, it may be considered a quality change, and content amount decreases may not be accurately reflected. Also, there may be cases of delayed reflection in statistics due to time lags between the price survey point and the actual shrinkflation application point. Due to this, official inflation rates may underestimate the price increases actually perceived by consumers.

  • Third, industry-specific patterns and characteristics of shrinkflation are appearing in various ways. In the food industry, shrinkflation is actively occurring centered on packaged foods such as snacks, chocolates, and ice creams. In the beverage industry, methods are used such as reducing the amount of contents while maintaining the size of PET bottles, or making the bottom part of the bottle thicker to reduce content amount. In the household goods field, there are many cases of reducing the number of sheets or decreasing thickness in tissues, wet wipes, etc. Cosmetics primarily utilize the method of reducing the amount of contents while changing container designs. These various forms of shrinkflation make it difficult for consumers to make direct comparisons, having the effect of dispersing perceived price increases.

  • Fourth, consumer awareness and response measures to shrinkflation are becoming important. As consumer awareness of shrinkflation increases, dissatisfaction and backlash are also increasing. There are cases where sharing shrinkflation examples through SNS or communities negatively affects corporate image. Some consumer organizations are strengthening monitoring and information disclosure of shrinkflation, and are demanding expansion of the unit price display system that allows easy comparison of prices versus content amount. Also, at the government level, considerations are being made on whether shrinkflation constitutes consumer deception, and methods for more accurate price measurement considering quality changes are being sought.

• While shrinkflation is a strategy to find a balance point between business cost pressures and consumer resistance, it can lead to decreased consumer trust and brand value in the long term. Also, it can be a factor hampering the effectiveness of price policies by expanding the gap between official price statistics and perceived inflation. Therefore, it is time for transparent disclosure and monitoring of shrinkflation, and improvement of price measurement methods considering it.

4️⃣ In Conclusion

As the consumer price inflation rate records 2.2%, exceeding government expectations, concerns about price stability are growing. In particular, consumers' complaints that "everything has increased in price" show the gap between official statistics and perceived inflation. This has economic and social implications beyond simple numbers.

The causes of price increases are diverse and complex. Major causes include international oil and raw material price increases, import price increases due to won weakness, service price pressures due to labor cost increases, and uncertainty about the U.S. new administration's tariff policy. In particular, with the Producer Price Index (PPI) showing 3.0%, higher than the Consumer Price Index (CPI), there is a possibility that businesses' cost burdens will be further passed on to consumer prices in the future.

The impact of price increases is not equally distributed across all classes. Due to differences in consumption patterns by income level, possibilities of substitute consumption, and gaps in income growth rates, the perceived inflation burden is greater for lower-income groups. In particular, lower-income groups with a high proportion of spending centered on essentials such as food, housing, and energy are more vulnerable to price increases in these items. These differences act as factors intensifying economic inequality and polarization.

The shrinkflation phenomenon is acting as a major factor further expanding the gap between official price statistics and consumer perception. This strategy of maintaining or slightly increasing product prices while reducing content amount is being confirmed in various fields such as food, household goods, and cosmetics. According to the Consumer Agency survey, about 38% of major essentials implemented shrinkflation over the past year, increasing the price burden perceived by consumers.

In this situation, the role of the government and policy authorities is becoming important. Along with monetary policy responses for price stability, customized support policies are needed to alleviate the price burden of vulnerable classes. Also, monitoring of hidden price increases such as shrinkflation should be strengthened, and methodological improvements to more accurately reflect these in price statistics should be sought.

Ultimately, the price issue is not simply an economic indicator issue but directly connected to people's quality of life and social integration. It is time for a comprehensive and balanced policy approach to prevent the polarization of price perception from leading to intensified social inequality.