This blog post calmly examines the structure of inflation and the resulting burdens on daily life within the flow of the economy, exploring why lunch costs and living expenses inevitably keep rising even as salaries stagnate.
Why do lunch prices keep going up?
While salaries remain stagnant, product prices show no sign of falling and keep climbing. Not just lunch prices, but bus fares, vegetables, fruits, and other everyday items have seen prices rise one after another. Anyone sensitive to the cost of groceries would have clearly felt this change starting around 2022. Generally, a certain level of inflation is constantly present in the economy, and the Bank of Korea has set an inflation policy target of around 2 percent annually for the medium to long term.
Why does inflation occur?
Inflation, which had been relatively stable for the past 30 years, reached serious levels globally starting in 2022. In South Korea, the consumer price index (CPI) rose 6.3 percent year-on-year in July 2022, the highest level since the foreign exchange crisis. The inflation rate subsequently slowed gradually, falling to the mid-to-high 2 percent range by mid-2023. However, the situation was more severe in major economies. By May 2022, the average inflation rate across OECD countries reached the mid-9% range, establishing a global inflationary phase. This represented a period of high inflation not experienced in 20 to 30 years, not only for South Korea but also for major advanced economies.
The background and causes of this inflation are highly complex. A key factor was the massive fiscal spending and sharp cuts in benchmark interest rates implemented by governments worldwide to manage the economic crisis caused by the COVID-19 pandemic. Additionally, the disruption in energy and raw material markets triggered by Russia’s invasion of Ukraine acted as a core factor stimulating inflation. It is difficult to definitively state which factor had the greatest impact. However, one undeniable fact is that inflation inflicts real hardship on individual citizens.
We purchase various goods and services to sustain our lives and to find enjoyment. Yet, when prices rise, maintaining the same standard of living becomes increasingly difficult. When wages alone become insufficient to cover living expenses, consumer choices diminish, and household finances tighten. In this sense, inflation produces an effect similar to a reduction in income. This is the most direct and significant harm people experience due to inflation.
However, inflation has a more complex structure compared to other economic hardships like reduced national income or increased unemployment. For instance, the situation changes if income increases alongside inflation. If income doubles while prices also double, there is little change in real living conditions. If income triples, even with prices doubling, it actually results in a gain on paper. Therefore, when evaluating the economy, we use real GDP growth—adjusted for price increases—rather than simple GDP growth rates.
However, even if real GDP increases, excessively high inflation levels remain problematic. In such cases, the previously mentioned issue of real income decline—where prices rise faster than income, creating burdens—does not necessarily affect the entire population equally. Instead, it accumulates unevenly across society.
Why is inflation problematic?
Consider hyperinflation as an extreme example. In 1920s Germany, the average monthly inflation rate exceeded 50 percent, and prices surged over 100-fold within a year, rendering normal monetary transactions impossible. Consequently, the economy plunged into uncontrollable chaos. Even today, countries experiencing severe inflation and national turmoil still exist. For example, Sri Lanka experienced inflation exceeding 50 percent annually in mid-2022, triggering massive protests that culminated in political turmoil and the collapse of the government. Türkiye also recorded an annual inflation rate well over 70 percent in 2022, experiencing severe economic instability.
Inflation is the phenomenon of prices for goods and services rising across the board. This means more money is needed to purchase the same goods, signifying a decline in the value of money. When hyperinflation occurs, money loses its function as a medium of exchange. Market economies operate by people smoothly exchanging goods and services using money as an intermediary; hyperinflation undermines this fundamental operating principle of the market economy itself.
The likelihood of advanced economies experiencing inflation at the levels seen in Sri Lanka or Türkiye is relatively low. The damage from 10% annual inflation cannot be equated with that from inflation exceeding 50% annually. However, this does not mean there is no disruption or harm. Just as GDP growth doesn’t mean equal income growth for all citizens, inflation doesn’t cause all goods to rise in price at the same rate. Some goods see sharp price hikes, while others remain relatively stable, leading to vastly different perceived gains or losses for individuals.
For example, Company Employee A, who receives a fixed salary under an annual contract, suffers real losses when inflation surges. Conversely, companies benefit because their real labor costs decrease while paying the same wages. Pensioners receiving a fixed annual amount also suffer losses as the real value of their pensions declines. Conversely, those with fixed-rate loans benefit as the real value of the amount they must repay decreases, but those with variable-rate loans may face significant burdens during central bank interest rate hikes.
Furthermore, as inflation intensifies, its volatility becomes harder to predict. Companies must frequently adjust prices, increasing administrative and logistics costs. Distorted price signals between goods reduce overall economic efficiency. The tax system also struggles to maintain real equity, while the gap between nominal and real interest rates impacts financial markets broadly, causing significant volatility in asset prices like stocks and real estate.
In this regard, high inflation shares similarities with the sharp surge in apartment prices seen around 2020. Clearly, some profited while others suffered losses. Yet even those who gained were not free from anxiety and burden, and considerable discomfort and unease spread throughout society. Inflation causes similar problems not only for housing prices but across a much wider range of goods and services. It simultaneously brings gains and losses to people through complex channels, ultimately burdening the entire economy.
Can inflation be stopped?
So, is there no way to stop inflation? Raising the central bank’s benchmark interest rate is a primary tool. Increasing rates reduces lending and shrinks the money supply, easing inflationary pressure. Central banks typically set the benchmark interest rate at regular intervals, giving this policy the advantage of relatively swift implementation.
However, raising interest rates can stifle economic activity in the short term, negatively impacting GDP. Depending on the causes and progression of inflation, the effects of high interest rates on the economy can vary greatly, and the risks are not insignificant.
Indeed, since 2022, both the United States and South Korea have rapidly raised their benchmark interest rates. The U.S. benchmark rate started in the 0% range in early 2022, rising to the mid-4% range by the end of that year, and remained in the 5% range throughout 2023. This was because the damage caused by high inflation to the economy was judged to be greater than the potential negative impact of high interest rates on GDP.
Since late 2023, the prevailing assessment is that this monetary policy has largely succeeded in moderating inflation. The feared large-scale unemployment or sharp economic downturn did not materialize. However, the cumulative impact of high interest rates on the real economy remains, making it difficult to draw hasty conclusions about the situation. While numerous economic experts and economists offer future projections, unexpected variables inevitably emerge in the economy.
Examining inflation and GDP issues together also makes it clear that the economy cannot be approached solely as a distribution problem between low-income and high-income groups. When GDP declines, unemployment worsens, harming ordinary citizens, but inflation also places a greater burden on relatively vulnerable groups. While the middle class can respond to some extent by adjusting consumption patterns or seeking cheaper alternatives, the poor, whose spending capacity is already limited, find it difficult to further reduce living expenses. Therefore, while equity issues are important, macroeconomic problems require an approach from a far more multidimensional perspective.
