🚨 Rising Engel Coefficients in South Korea and Japan Signal Increasing Cost of Living Burden

Today Korean Economic News | 2025.04.06

📌 Rising Engel Coefficients Due to Increasing Cost of Living Burden

💬 Recently, the Engel coefficient, which represents the proportion of food expenses in household consumption, has been rising in both South Korea and Japan. This is attributed to rising food prices and declining real wages. In particular, Japan recorded an Engel coefficient of 28.7% in 2024, the highest in 43 years. South Korea's also rose to 28.8% in 2024, indicating an increasing burden on household living expenses.

1️⃣ Easy to Understand

News about rising Engel coefficients has been making headlines. Let me explain what this means and why it's important for our lives.

The Engel coefficient refers to the ratio of food expenditure to total household spending. According to a law discovered by 19th-century German statistician Ernst Engel, households with lower incomes tend to spend a higher proportion of their budget on food. Conversely, as income increases, the proportion spent on food decreases while spending on education, leisure, and culture increases.

Recently, this Engel coefficient has been rising significantly in both South Korea and Japan. In South Korea, the Engel coefficient reached 28.8% in 2024, while Japan recorded 28.7%, its highest level in 43 years. This can be interpreted as a signal that household economies in both countries are facing difficulties.

There are two main causes for this increase. First, food prices are rapidly rising. Global supply chain instability, poor harvests due to climate change, and rising energy prices are all driving up food prices. Second, real wages (actual purchasing power accounting for inflation) are decreasing. As inflation rates outpace wage growth, households' actual purchasing power is declining.

The rise in Engel coefficients shows that household economic burdens are increasing. When the proportion spent on essential food expenses increases, there is relatively less money available for education, leisure, and savings. This can lead to a decline in quality of life and, from an economy-wide perspective, could result in reduced consumption and slower growth.

What's particularly noteworthy is that this rise in Engel coefficients is occurring simultaneously in both South Korea and Japan. Both countries face similar economic challenges including low birth rates, aging populations, and slow growth. The rising Engel coefficient is one indicator showing how these structural problems are affecting household economies.

Governments are exploring various responses to improve this situation, including food price stabilization policies, expanded support for vulnerable groups, and labor market policies to improve real wages. At the household level, efforts are needed to reduce food expense burdens through rational consumption, reducing food waste, and selecting foods with good nutritional value relative to price.

2️⃣ Economic Terms

📕 Engel Coefficient

The Engel coefficient is an economic indicator representing the proportion of food expenses in total household expenditure.

• Based on a law discovered by German statistician Ernst Engel, there is a tendency for the Engel coefficient to increase as income decreases.
• Generally, developed countries have lower Engel coefficients, while developing countries have higher ones.
• A rising Engel coefficient is interpreted as a signal of increasing household economic difficulties.

📕 Real Wages

Real wages refer to wages with actual purchasing power when considering inflation rates.

• They represent actual living standards by excluding inflation from nominal wages (numerical wages).
• A decrease in real wages means that the amount of goods and services that can be purchased with the same wage has decreased.
• The recent decrease in real wages in South Korea and Japan is because inflation rates exceed wage growth rates.

📕 Cost of Living Burden

Cost of living burden refers to the proportion of essential living expenses relative to household income.

• The cost of living burden increases as the proportion of essential expenses such as food, housing, medical care, and transportation increases in relation to income.
• An increased cost of living burden leads to a decrease in disposable income available for savings, investment, and leisure activities.
• Vulnerable groups tend to feel a greater cost of living burden.

📕 Consumer Price Index

The consumer price index is an indicator that measures price changes in goods and services purchased by consumers.

• It indicates changes in price levels compared to a base year (2020=100 in South Korea's case).
• It comprehensively reflects price changes across various categories including food, housing, transportation, and medical care.
• Recent increases in consumer price indices in South Korea and Japan are primarily due to food price increases.

3️⃣ Principles and Economic Outlook

💡 Causes and Characteristics of Rising Engel Coefficients in South Korea and Japan

• Let's analyze the causes and characteristics of the simultaneously rising Engel coefficients in South Korea and Japan.

  • First, persistent food price increases are the main cause. In South Korea, food inflation over the past three years has averaged over 6%, significantly exceeding the overall inflation rate (3.5%). Price increases have been particularly notable for basic food ingredients including grains, meat, fruits, and vegetables. Japan also recorded a food inflation rate of 5.2% in 2024, the highest in 25 years. These food price increases are the result of multiple factors working together. These include global supply chain disruptions, increased production and distribution costs due to rising energy prices, poor harvests due to climate change, and structural vulnerabilities in both countries due to low food self-sufficiency rates making them susceptible to international agricultural price fluctuations. Recent geopolitical tensions leading to higher shipping costs and export restrictions by major food-producing countries have also contributed to additional price increases.

  • Second, stagnant or declining real wages have weakened household purchasing power. South Korea's real wages have decreased for two consecutive years since 2023, while Japan has recorded 25 consecutive months of real wage decreases. Household purchasing power is declining as inflation rates consistently outpace wage growth rates. In particular, non-regular workers, self-employed individuals, and low-income groups are experiencing larger decreases in real income, widening the gap between income groups. The background of stagnant real wages includes both countries' continued low-growth trends limiting companies' ability to increase wages, and structural changes in the labor market degrading employment quality. In this income environment, spending on essential food items is relatively difficult to reduce, leading to rising Engel coefficients.

  • Third, demographic changes and the increase in single-person households are contributing to rising Engel coefficients. Both South Korea and Japan show trends of rapid aging and increasing single-person households. Elderly households generally tend to have a higher proportion of food expenditure, and single-person households find it difficult to benefit from economies of scale, resulting in relatively higher food expense burdens. In South Korea, the proportion of single-person households exceeded 34% in 2024, and Japan is approaching 35%. These households tend to rely on small-packaged products, convenience foods, and dining out, paying higher unit costs for the same food. Additionally, elderly households tend to maintain food expenses while reducing other consumption items due to increased medical expenses, naturally leading to an increase in the proportion of food expenses.

  • Fourth, changes in consumption patterns and trends toward premium and diverse food consumption are noteworthy. Both South Korea and Japan show trends of increased health awareness, emphasis on food safety, and preference for organic and eco-friendly products. These high-quality foods are more expensive than regular products, leading to increased food expenditure. Consumer behavior changes following COVID-19, such as increased remote work, expanded online food purchases, and increased delivery food use, have also contributed to rising food expenses. Particularly among younger generations, there is a spreading culture that values food experiences and quality, leading to a tendency to adjust other expenses rather than reduce food costs. However, this factor is limited to upper-income groups, while low-income groups continue to experience an unavoidable increase in food expense proportions due to economic burdens.

• The rising Engel coefficients in South Korea and Japan are the result of various factors working together, including food price increases, real wage decreases, demographic changes, and shifting consumption patterns. This trend may become established as a long-term trend, particularly in conjunction with the structural challenges both countries face: low growth, low birth rates, and aging populations. As the rising Engel coefficient goes beyond a simple statistical indicator change to signify household economic difficulties and decreased consumption capacity, policy efforts for food price stabilization and income improvement have become increasingly important.

💡 Impacts of Rising Engel Coefficients on Household Economies and Consumption Patterns

• Let's examine the specific impacts of rising Engel coefficients on household economies and consumption patterns.

  • First, decreased disposable income and reduced leisure and cultural consumption are evident. As the proportion of food expenses increases, disposable income available for other expenditure categories decreases. In fact, both South Korea and Japan show declining trends in leisure, cultural, and educational expenditures. In South Korea, household cultural and leisure spending decreased by 3.2% compared to the previous year in 2024, with Japan showing a similar trend. This demonstrates that when household budgets are under pressure, leisure and cultural consumption are the primary items reduced since food is an essential good. The decrease in cultural and leisure consumption among the middle class is concerning as it could lead to a decline in their quality of life and a depression in related industries. Additionally, there is a tendency to reduce adult education and self-development investments (excluding children's education expenses), which could negatively impact human capital formation in the long term.

  • Second, changes in food consumption patterns and polarization phenomena are intensifying. As food expense burdens increase, households are adjusting their food consumption in various ways. On one hand, there's an increase in rational consumption through switching to lower-priced substitutes, utilizing discount events, and reducing unit costs through bulk purchases. In South Korea, sales of private brand (PB) products at large supermarkets increased by more than 20%, while in Japan, sales at low-price supermarkets and discount stores rose. On the other hand, polarization in food consumption according to income level is intensifying. While high-income groups continue to enjoy premium foods and dining out, low-income groups tend to focus on calorie intake rather than nutritional balance, raising concerns about health inequality. In fact, both countries show declining trends in fresh fruit and vegetable consumption among low-income groups.

  • Third, there are concerns about a vicious cycle of psychological pressure and consumption contraction. Rising Engel coefficients place economic pressure on households, which can lead to a contraction in overall consumer sentiment. South Korea's consumer sentiment index has been declining since early 2024, and Japan's consumer confidence index is also falling. This consumption sentiment contraction can lead to economic recession as consumers refrain from spending beyond essential expenditures. What's particularly problematic is that this consumption contraction can create a vicious cycle by leading to decreased corporate sales, employment insecurity, and wage stagnation, which further exacerbate household income decreases and consumption contraction. While economic anxiety can lead to increased saving rates, low-income groups lack additional saving capacity, making it difficult to prepare for the future.

  • Fourth, generational and class gaps are accelerating. Rising Engel coefficients do not affect all households equally. Generally, economically vulnerable groups such as low-income groups, elderly households, single-person households, and self-employed individuals are hit harder. In South Korea, the Engel coefficient for the bottom 20% income households is 33%, much higher than the 23% for the top 20%. Japan shows similar disparities. These differences suggest that food price increases can weaken income redistribution effects and intensify inequality. Young generations are particularly vulnerable to increased food expense burdens due to other essential expenditures such as housing costs, education expenses, and debt repayment. In contrast, elderly groups with assets can relatively mitigate economic shocks despite income decreases, possibly exacerbating generational wealth imbalances.

• The rise in Engel coefficients goes beyond a simple statistical phenomenon of increased food expense proportions to affect various aspects of household economies. Decreased disposable income, changing consumption patterns, psychological pressure, and widening class gaps are all interconnected and can negatively impact not only individual quality of life but also the vitality of the entire economy. Particularly if the rising Engel coefficient is due to structural factors, a mid-to-long-term approach focused on increasing income and stabilizing food prices is needed rather than short-term measures.

💡 Policy Challenges and Outlook for Mitigating Engel Coefficients

• Let's examine policy challenges and future outlook for mitigating the rising trend of Engel coefficients.

  • First, a multifaceted approach is needed to stabilize food prices. Governments can promote price stability through food supply chain stabilization, distribution structure improvement, and strengthened food supply and demand management. Particularly as both South Korea and Japan have low food self-sufficiency rates, it's important to strengthen the production base of core agricultural products while establishing a stable supply system through import diversification. In South Korea, efforts to reduce distribution costs through promoting direct agricultural product transactions and expanding online distribution are underway. Japan is also improving productivity through expanded smart agriculture and reduced food waste. Both countries need to strengthen food price monitoring systems and take market stabilization measures when necessary, such as releasing government stockpiles and applying tariff quotas. However, short-term price stabilization measures cannot be fundamental solutions, so structural approaches such as improving agricultural productivity and food supply chain efficiency should be pursued in parallel.

  • Second, economic policies for increasing real income should be strengthened. To address stagnant real income, another cause of rising Engel coefficients, wage increases, job quality improvements, and expanded support for low-income groups are necessary. South Korea is focusing on increasing the minimum wage, supporting productivity improvements in small and medium-sized enterprises, and creating quality jobs. Japan is encouraging wage increases and pursuing improved treatment of non-regular workers under its "new capitalism" policy. Both countries also need to strengthen income support policies such as food support programs for vulnerable groups, energy vouchers, and housing cost support. Customized support to preserve real purchasing power for low-income groups during inflationary periods is particularly important. In the long term, the fundamental solution will be creating an economic structure where productivity improvements and wage increases form a virtuous cycle through education, R&D investment, and industrial structure advancement.

  • Third, support and education for reducing consumers' food expense burdens are necessary. The government and private sector can collaborate to prepare various support measures for rational food consumption. Representative examples include expanded food vouchers for low-income groups, public meal support, and promoting food sharing. There's also a need to strengthen consumer education on reducing food waste, meal planning considering nutrition and economy, and food purchasing tips. Digital technology applications such as food price comparison apps and diet management programs can also be tools to help consumers make rational choices. Additionally, alternative food systems such as community-supported agriculture, urban agriculture, and food cooperatives centered around local communities should be promoted. These approaches can contribute not only to reducing food expenses but also to forming healthy eating habits and sustainable food consumption cultures.

• The problem of rising Engel coefficients is a structural challenge that cannot be solved by short-term measures alone. A multi-layered approach including food price stabilization, real income increases, and consumer support and education is necessary. Particularly as macroeconomic factors such as food security, income inequality, and demographic changes are working together in complex ways, comprehensive responses through cooperation between government, businesses, and civil society are important. While the Engel coefficient may remain at high levels for the time being, it is expected to gradually stabilize through economic recovery and structural reforms in the long term.

4️⃣ In Conclusion

The rising Engel coefficients in South Korea and Japan are an important signal that household economic difficulties are intensifying. South Korea's Engel coefficient recorded 28.8% in 2024, while Japan's reached 28.7%, both countries recording high levels.

The main causes of this increase can be summarized in two points. First, food prices are continuously rising. Global supply chain instability, climate change impacts, and rising energy prices are working together to drive up food prices. Second, real wages are stagnating or decreasing. Household real purchasing power is weakening as inflation rates outpace wage growth rates.

Rising Engel coefficients have various impacts on household economies. Disposable income decreases, leading to reduced spending on leisure, culture, and education, and changes in food consumption patterns. Economic pressure also leads to overall consumer sentiment contraction, which can negatively impact domestic economic conditions. Vulnerable groups such as low-income households, elderly households, and single-person households are hit particularly hard, raising concerns about widening social disparities.

To address these issues, multifaceted policy approaches including food price stabilization, real income increases, and consumer support and education are necessary. Governments are working to reduce household burdens through food supply chain stabilization, distribution structure improvement, and expanded support for vulnerable groups.

The rising Engel coefficient is not a temporary phenomenon but an indicator reflecting economic structure and social changes, making mid-to-long-term approaches more important than short-term measures. It is time to promote household economic stability and improved quality of life for citizens through strengthened food security, resolved income inequality, and establishment of sustainable food systems.