[Editorial] Lopsided recovery

Economic recoveries tend to look better from a distance. South Korea is enjoying a semiconductor boom and is heading for its fastest annual growth in five years, yet many households are living in a far less forgiving economy.

On Thursday, the Bank of Korea raised its benchmark rate by another 25 basis points to 3 percent, and lifted its 2026 growth forecast to 3.3 percent. For indebted households, neither figure offers much consolation.

The problem is the uneven way inflation and interest rates hit household budgets. Consumer prices rose 2.8 percent in July from a year earlier, and core inflation reached 2.6 percent, its highest since December 2023.

Essential food prices have been even more punishing. In the second quarter, rice rose 13.2 percent, potatoes 11.1 percent and eggs 9 percent. Prices of low-cost meals such as gimbap also rose faster than the overall consumer price index.

Such increases matter more to poorer households because necessities consume a larger share of their income. Spending on food rose 6.9 percent among households in the second-lowest income quintile, compared with 1.8 percent for the 20 percent in the highest incomes.

Interest costs show an even wider divide. Monthly interest expenses for the bottom 20 percent of households jumped 36.1 percent year on year in the second quarter, nearly three times the 12.1 percent increase for all households.

Debt statistics reveal how quickly this strain is becoming entrenched. Nearly 97,200 people entered formal debt adjustment programs during the first half of this year. Among borrowers who were making payments under such arrangements, applications for small emergency loans reached 14,894 in the second quarter, the highest quarterly figure since 2022.

A borrower who restructures a debt and then takes out another loan to cover living expenses is hardly on the road to financial recovery.

This makes the policy mix particularly awkward. The BOK is tightening because inflation could broaden as the recovery strengthens. At the same time, the government is pursuing measures to ease financial burdens, including a planned 6 trillion won ($4.3 billion) debt relief program for struggling small-business owners and expanded lending through financial institutions.

Assistance for people in genuine distress is necessary. But broad credit support can blunt the effect of monetary tightening, giving the central bank less room to ease rates.

The result is a peculiar policy loop. Fiscal measures bolster demand, whereas monetary policy raises the price of money. The first boosts inflation, the second contains it. But they do not simply cancel each other out, because the effects are uneven. The risk is that those who can least absorb higher interest costs end up bearing the costs of both approaches.

External pressures could complicate the dilemma. At the annual Jackson Hole Economic Policy Symposium in Moran, Wyoming, on Friday, new Federal Reserve Chair Kevin Warsh said underlying US inflation had not improved enough and emphasized the Fed’s responsibility for price stability.

If US rates rise and Korea keeps its rate at 3 percent, the current 0.75 percentage-point gap could widen, putting renewed pressure on the won and raising import costs.

Korea cannot assume that export strength will rescue domestic demand. July retail sales fell 2.4 percent despite semiconductor exports reaching $41 billion. A booming export sector can coexist with a struggling consumer economy.

The Lee Jae Myung administration must make fiscal policy more precise. Direct support for households most in need would cushion hardship without adding unnecessary demand. Food prices require attention to supply and distribution. Debt programs should help viable borrowers regain solvency and allow unviable businesses to close, rather than merely rolling their loans forward.

The chip boom has given Korea’s macroeconomic numbers a glossy finish. Household finances tell a more prosaic story. When groceries and debt cost more, aggregate growth offers little protection to those closest to the margin. The recovery may look broad in the national accounts, yet its costs remain unevenly distributed among households.