Inflation weighs down on consumer confidence

By Kim Jae-won

Consumer confidence declined this month due to rising inflationary pressure amid growing household debt, the Bank of Korea (BOK) said Friday, the first fall in three months.

The consumer sentiment index (CSI) marked 102 in June, down 2 points from the previous month, the central bank said in a monthly report.

The CSI is a barometer which measures consumers' overall economic outlook, living conditions and future spending. A reading above 100 indicates optimists outnumber pessimists.

The sentiment index fell in June after rising for the second consecutive month in May. The CSI stood at 98 for March, and rose to 100 in April and 104 in May.

“Rising inflation pressure is the key factor behind the CSI decline,” said Jang Wan-sub, a senior official at the BOK.

The inflation rate rose 4.1 percent in May, surpassing the BOK’s upper ceiling of its 2 to 4 percent target band for the fifth consecutive month since January. The core inflation rate, which excludes volatile oil and food prices, also increased 3.5 percent from a year ago marking the highest level in 23 months.

Jang also pointed out, “Concerns on household debt also affected consumers’ sentiment negatively for future spending.”

Household debt reached a new high of 801.4 trillion won (about $733 billion) in March, rising by 6 trillion won for the three first months this year, according to the BOK. When combined with unsecured loans, the country’s household debt is believed to be around 1 quadrillion won, matching an entire year’s gross domestic product (GDP).

Experts say that the amount of debt will increase more as the BOK hiked the key interest rate by a quarter percentage point this month to 3.25 percent.

Some experts say that sovereign debt crisis in Greece also may have hurt consumers’ confidence creating economic uncertainties. Greek is waiting for a second bailout from its neighboring European nations as it has struggled to overcome its debt-driven economic situation.

The BOK said that consumer confidence is not quite worrisome because the figure is still over 100.

The CSI is based on a poll of 2,018 households in 56 major cities, which was conducted from June 13 to 20.