Soaring prices in service sector to hamper economy
Soaring prices in the service sector are feared to thwart economic recovery, as they will weaken people’s purchasing power despite increased outdoor activities following the lifting of social distancing measures here, experts said Monday.
According to data from Statistics Korea, prices in the service sector rose by 4.5 percent in April from the previous year. This rise was the steepest increase in more than 13 years.
Prices of personal services rose around 1 percent in 2020 in the early days of the COVID-19 pandemic. But they have started increasing rapidly after hitting the 3-percent range in November. Economists explain that the rising service prices reflect not only the increase in costs but also the recovery of demand for services, as households have become accustomed to the ongoing pandemic.
With the government easing most of the two-year-long social distancing restrictions in mid-April of this year, consumers are also widely expected to engage in more consumption for the time being by expanding their outdoor activities.
Experts, however, said the rising
prices will end up weakening household consumption to some extent, as most of their nominal income will not increase dramatically.
“When prices rise, consumers’ real purchasing power reduces,” Korea Capital Market Institute economist Kang Hyun-ju said. “If the increase
in consumer prices keep hovering over 4 percent this year, this will weaken households’ consumption.”
Even if more people enjoy outdoor activities and expand consumption there, that will result in price hikes in the service sector, he added.
“There stands a possibility that their consumption will decrease in the latter half of 2022 amid the growing burden from the rising prices,” he said.
The latest data showed that prices in travel, aviation and leisure activities soared especially steeply. Prices in group travel jumped by 20.1 percent, and flight prices also increased by 8.8 percent during the same period. Prices for movie tickets also rose by 7.7 percent.
The statistics authority said the service prices would be on a gradual rise for the foreseeable future due to the easing of social distancing.
“The pandemic restrictions have de facto been lifted and consumer sentiment remains solid,” Eo Woonsun, an official from the statistics authority, told reporters in a recent press conference. “Given the rising prices of dining out, chances are slim that the rise in personal service prices will slow down notably.”
Yuanta Securities analyst Chung Won-il said that the Korean economy would continue facing inflationary pressure due to the steep increase in prices.
“Consumer prices in April rose at a faster-than-expected pace of 4.8 percent,” he said. But as the Bank of Korea already pushed for a preemptive rate hike of 25 basis points to 1.5 percent in April and identified the U.S. Federal Reserve’s latest move to increase its key rate by 50 basis points as a predictable result, there stands a possibility that the Korean central bank will freeze its key rate in May, according to Chung.
There stands a possibility that their consumption will decrease in the latter half of 2022 amid the growing burden from the rising prices.