By Kim Tong-hyung
The confidence of Korean consumers in the economy and their finances fell sharply in August as they continue to be rattled by rising prices and economic uncertainty, dealing a fresh blow to the country’s recovery hopes.
And to further raise concerns over the economy, Koreans’ expectations for inflation over the next 12 months rose to 4.2 percent, the highest level in more than two years, according to a report released by the Bank of Korea (BOK) Thursday.
This reinforces fears that interest rates will have to rise soon to bring inflation back under control, but the BOK’s rate setters are reluctant to pull the trigger when there is a looming threat that the current economic slowdown will turn into a full-blown recession.
The consumer sentiment index (CSI) for August is at 99, down from July’s 102, and falling below 100 for the first time since March. A sub-100 reading means that pessimists outnumber optimists.
The bank’s survey was based on a poll of 1,988 families in 56 cities, conducted from Aug. 11 to 19. People were feeling particularly glum about personal finances, spending capabilities and job prospects, while inflation was obviously a major concern for those quizzed, bank officials said.
“The U.S. credit rating downgrade and expanding eurozone debt crises are clearly taking a toll on consumer sentiment,” said an official from the BOK’s economic statistics division.
People’s unwillingness to spend continues to be a drag on the CSI. A sub-index for measuring consumers’ expectations for their future consumption levels dropped 3 points in August to 106, while an index for forecasting household income fell 2 points. An index for measuring consumers’ outlook for the wider economy fell 11 points to 77 to show the sharpest monthly decline since March.
A toxic blend of higher prices, stagnant income, bloating debt and subduing economic activity has been leading to an acute squeeze in living standards here. And it seems that the economic difficulties are biting harder into the middle-class and low-income families than those depending on higher earners.
The CSI’s sub-index on current economic conditions dropped 6 points to 82 among families earning between 3 and 4 million won in monthly income, and rose by 4 points to 102 among families earning more than 5 million won.
The index rose 2 points to 74 among families earning less than 1 million won a month, but bank officials said this had less to do with improving prospects than a base effect generated from the sharp drop in July.
Families earning more than 5 million won a month were the only section of the income bracket that posted a 100-plus reading in the index for forecasting future household income.
These expectations are considered important because inflation often proves a self-fulfilling prophecy. If people believe inflation will continue to rise, businesses will carry on raising prices of products and services to make price instability worse and harder to tame.
The inflation expectations for August matched the 4.2 percent polled in March of 2009. More than 64 percent of those quizzed believed that consumer prices will continue to rise above the government’s target of 4 percent.
Consumer price inflation has been hovering over 4 percent and above expectations for seven consecutive months through July. And there are worries that prices will hit a new peak in the coming weeks with soaring food prices following the bizarre summer weather that devastated crop yields. Household fuel and utilities bills also continue to rise and the Chuseok holiday, the annual-inflation feeder, is just a couple of weeks away.
The bank held the country’s policy rate at 3.25 percent earlier this month for the second consecutive month, despite inflation peaking at 4.7 percent in July on higher food, fuel and rent prices, with the heightening uncertainties in the global economy dissuading rate-setters from an increase.