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Economic Outlook

KDI Economic Outlook 2017-1st Half

Changes in the Real Purchasing Power by Income Quintile and the Implications

SUMMARY ■ The discrepancies in the real purchasing power of different income quintiles is due to the varying growths in nominal income created before the financial crisis. As for CPI inflation, it is very similar across all income levels.

■ The above findings imply that improving the income of low income
households should be an essential part of policy to reduce the imbalance between consumption capacity and real income.
Report VOD
The recent rise in inflation,
driven mainly by oil and agricultural product prices,
has given rise to concerns
that the living conditions of low-income households are worsening.

this study analyzes the changes and discrepancies
in the real purchasing power of different income quintiles and draws on the implications,
to examine the increasing burden of low-income households.

Real purchasing power is the purchasing power as determined
by real income, and therefore can be ascertained through real income
which reflects both the CPI and nominal income.

So, let’s look into the CPI and changes in the nominal income from 2003 to 2016.

A comparison of the yearly average CPI inflation rate by income quintile
reveals that there was little change during the 13-year period,
with total households averaging 2.2%,
the lowest or first income quintile 2.26% and the highest or fifth income quintile 2.22%.

On the other hand,
the nominal income revealed a gap between the quintiles,
with the first averaging a yearly growth of 3.5% and the fifth 4.2%.

Such a gap in income has been long-sustained since the 2008 financial crisis,
when the growth rate of the first quintile’s average yearly nominal income was just half of the fifth quintile’s.

Next, on an examination of the real income, which reflects the CPI and nominal income,
we can observe that,
while the real monthly income for the first quintile increased an average
of just 200,000 won, from 1.23 million to 1.43 million,
that of the fifth increased a staggering 1.79 million won, hitting 8.25 million from 6.46 million.
Based on the comparison results,
it can be estimated that the gap in the real purchasing power
between the first and fifth quintiles increased by more than 10% during the past 13 years,
mainly driven by the growth rate in nominal income than inflation.

Then, how has the gap in real purchasing power changed household income?

If we review the type of household income by quintile,
we can see that the real earned income of the first quintile has stalled
since 2003 while that of the fifth quintile has consistently risen.

It should be noted, however,
that the real purchasing power gap has not widened as the transfer income of the former has increased rapidly since the financial crisis.

The main force driving the sluggish growth in the first quintile’s earned income
is the increase in the share of households aged 60 and over,
whose earned income has decreased upon retirement.

IThe gap in the real purchasing power between low- and high-income households is the result of the disparity in the growth of nominal income predating the financial crisis. During the period, the CPI inflation has maintained a consistent increase regardless of income level. This implies that in order to stabilize the imbalance between households’ consumption capacity and real income, policies to improve the income of particularly low-income households are vital.

In addition, policies are urgently needed to secure the supply and stabilize the prices of highly purchased essentials. However, intentionally controlling the prices of certain items, in terms of perceived inflation, could distort the distribution of resources throughout the overall economy. Also income conditions, primarily for low income groups, should be enhanced to ease the purchasing power gap.
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