Why Are Prices Rising When My Salary Isn't? Turns Out It's Because of 'IT Bonuses'?

Imagine this. On your way to work this morning, you stopped by your local cafe for a change of pace as usual. You tried to order the iced Americano you drink every day for 4,500 won, but suddenly the number on the menu has jumped to 5,000 won. The price of the spicy stir-fried pork you had with your colleagues at a restaurant during your lunch break also jumped by a thousand won, surpassing 10,000 won. You let out a bitter sigh, thinking, “Everything is going up except my salary,” and turn on the news on your smartphone.

However, the main article in the economy section is dazzlingly decorated with news that employees of large IT companies have thrown a feast of multi-million won bonuses due to the semiconductor boom. Seeing that news, many of you probably felt a mix of envy and a strange sense of distance. It’s easy to think, “Their glamorous festival is a story from another world that has nothing to do with my harsh reality.”

But did you know that one of the reasons why the price of the coffee you drink every day and your lunch costs have gone up is precisely because of those “massive IT corporate bonuses”?

These two events, which seem completely unrelated and far away, are actually tightly and stickily intertwined within the giant cogwheel of our economy. Today, based on the recent inflation outlook report published by the Bank of Korea, I will be your smart and friendly guide to easily explain exactly why our wallets keep getting thinner and what kind of economic butterfly effect is hidden behind it.

Why Is This Important? (Why It Matters)

Just as we go to the hospital for regular blood tests and checkups, the national economy also needs regular examinations to see if it is running properly. Twice a year, the Bank of Korea publishes a price stability review report and holds briefings to transparently disclose the blood pressure and body temperature of our economy to the public BOK: “High inflation will continue even after the war ends… Forecasted to rise around 3%”. This report is not simply a numbers game for economists. It serves as a very important compass that helps us gauge how much more living expenses we will have to spend at the supermarket in the future, and how the interest on the loans we have to pay back every month will change.

The results of this recently announced diagnosis have given us quite a heavy homework assignment. The Bank of Korea firmly predicted that the consumer inflation rate in the second half of this year will record around 3% BOK “Inflation rate in the second half around 3%… Expected to exceed 2% next year as well”. Also, an official from the Bank of Korea officially stated, “During the second half of this year, consumer inflation will show an increase of around 3%, and core inflation (excluding food and energy) will be in the mid-to-high 2% range” BOK “Inflation will continue to show a high growth rate for a considerable period”.

Why is this number important to our lives? Prices are a measure of our standard of living. The ideal inflation rate ultimately targeted by the Bank of Korea—the ‘stable target level’ at which the economy can grow most healthily—is 2.0% BOK “Inflation rate in the second half around 3%… Expected to exceed 2% next year as well”. However, the reality is that we are hitting the 3% wall, which is far beyond this, and it is hardly coming down BOK “Inflation rate in the second half around 3%… Expected to exceed 2% next year as well” : Nate News….

Simply put, the fact that prices consistently exceed the target means that the actual value of the 10,000 won bill in your wallet is melting away at a faster rate today than yesterday, and tomorrow than today. If a 3% inflation rate persists for 10 years, the current 10,000 won will eventually shrink to a value of just over 7,000 won. Beyond just the rising prices of grocery shopping, a very serious warning light has turned on that the actual asset value we have sweat to accumulate is evaporating.

Easy to Understand (The Explainer)

When you read economic news, it is full of confusing Sino-Korean words and professional jargon. Let’s translate these seemingly complex concepts into our everyday experiences so they are very easy to understand.

1. Consumer Inflation vs. Core Inflation: The Number on the Scale vs. My Body Fat Percentage

You have probably heard the terms ‘consumer inflation’ and ‘core inflation’ frequently in the news. You can understand these two intuitively by comparing them to a diet.

Let’s assume you decide to go on a diet and step on the scale every morning. If you ate salty ramen the night before or drank a lot of water in the morning, the number on the scale fluctuates by 1~2kg in just one day. This superficial weight that constantly changes due to external factors such as weather and geopolitical issues is precisely ‘consumer inflation’. If international oil prices suddenly skyrocket overnight, or if autumn typhoons cause cabbage prices to become as expensive as gold, consumer prices immediately fluctuate.

However, we know very well that the 1kg gained in one day does not mean our body has actually put on real fat. To find out the true basic physical strength and obesity level of our body, we need to measure the pure ‘body fat percentage’ by subtracting the highly volatile water weight. The same goes for the economy. The true body fat percentage, extracted by completely excluding the prices of ‘agricultural products (food)’ and ‘energy (oil, etc.)’—which wildly go up and down due to weather or war—and capturing only the very fundamental trend of the economy. That is precisely ‘core inflation (excluding food and energy)’.

The problem is that while consumer inflation in the second half of the year is expected to remain high at around 3%, the Bank of Korea predicted that even core inflation, the fundamental physical strength of the economy, will reach the mid-to-high 2% level BOK “Inflation rate in the second half around 3%… Expected to exceed 2% next year as well”. This means that even excluding temporary weather or oil price shocks, there is a strong underlying pressure festering inside our economy that is pushing up the prices of goods. What on earth is putting so much fat on our economy? This is where a very interesting and frightening butterfly effect comes into play.

2. The Domino Effect of IT Bonuses: When the Front Row Stands Up, the Back Row Must Stand Up Too

Let’s go back to the news we talked about in the introduction, the story about the IT industry’s bonus feast. Looking at people receiving tens of millions of won in bonuses due to the semiconductor boom is not an issue that ends with just feeling envious. The Bank of Korea presented a very sharp analysis that the expansion of bonuses in the information technology (IT) sector due to the semiconductor boom could eventually spread to wage increases across the entire industry, thereby driving up overall prices, warning of this as ‘IT-driven inflation’ Money Today - Real-time news where you can see money.

What exactly is the mechanism behind this? Let’s compare it to an everyday situation.

You went to a large concert of a singer you were highly anticipating. All the audience members were sitting peacefully in their reserved seats enjoying the performance. But as the atmosphere ripened, the VIP section audience in the very front row (IT and semiconductor industry workers) got so excited that they jumped out of their seats (large-scale bonuses and wage increases).

What happens when the front row stands up? The people sitting in the row right behind them (other industries competing closely with or related to the IT industry) have their view blocked and cannot see the stage. Since they cannot see the front, they have no choice but to stand up from their seats as well. Then the people behind them also have to stand up because they can’t see, and eventually, like doing the wave, everyone up to the people sitting in the very back row of the concert hall ends up watching the performance standing. The audience members who were comfortably seated at first find themselves in a situation where their legs hurt and they get tired for no reason.

Economic phenomena are exactly like this. When top-tier IT companies offer massive bonuses and suck up excellent talent like a black hole, other ordinary companies around them must force themselves to raise wages to avoid losing those talents. This ‘domino effect of wage increases’ cascades and eventually spreads throughout the entire industry.

This is not a vague guess. Thorough statistics prove it. According to the precise analysis results of the Bank of Korea, if the increase in bonuses in the IT industry grows to the top 10% or more, it further increases the fixed wages of seemingly unrelated industries by 0.02 to 0.03 percentage points, and its scope of spread also widens rapidly Why is my wallet getting thinner?… The paradox of Samsung and SK Hynix’s bonus feast.

If labor costs for employees rise like dominoes across the industry like this, how will companies bear these increased costs? Unless they are charities, companies cannot take the loss. Ultimately, the increased labor costs are entirely passed on to consumers like us by raising the price tags of products and service fees. This is exactly one of the many reasons hidden within this structure as to why the price of the coffee we drink and the rice at the restaurant we eat every day are quietly but surely going up.

The Current Situation (Where We Stand)

So are IT bonuses the only culprit for all these price increases? Unfortunately, the current economic situation is close to a ‘Perfect Storm (a massive complex crisis)’ where several bad news factors overlap all at once. In addition to the domestic wage domino effect, it is a situation where fierce economic typhoons blowing from the outside have also overlapped.

According to a report analyzing the fundamental trend of inflation, our economy is currently surrounded by a massive quintuple whammy—high oil prices, a high exchange rate, consumption recovery, wage increases, and pressure to increase public utility rates—and is receiving strong upward pressure BOK “Inflation rate in the second half around 3%… Expected to exceed 2% next year as well”.

1. High Oil Prices: When the price of oil imported from overseas becomes expensive due to instability in the Middle East, the transportation costs for the trucks that carry goods increase, and the cost of producing the electricity to run factories jumps.
2. High Exchange Rate: While we previously only had to pay 1,100 won to import a $1 item, we now have to pay over 1,300 won. When importing the wheat flour for the bread we eat or coffee beans, we have to pay much more of our money than before, so retail prices naturally skyrocket.
3. Public Utility Rate Hikes: As electricity and gas rates, which had been suppressed until now, are being realistically adjusted, they are choking local self-employed business owners and companies, and this is stimulating product prices again.

Given this situation, many people hold on to the hopeful expectation, “If the war on the other side of the world ends and oil prices stabilize, won’t prices become cheap again like the old days?” However, the Bank of Korea poured cold water on these vague expectations. The Bank of Korea firmly drew a line, stating, “High inflation will continue even after the war ends,” warning that simply because an external shock disappears, prices that have gone up once will not easily return to their previous levels BOK: “High inflation will continue even after the war ends… Forecasted to rise around 3%”.

This is because, much like the ‘wage increase domino (IT-driven inflation)’ phenomenon mentioned earlier, the factors for rising labor and service costs have already been deeply embedded into the deep structure of the economy.

What Will Happen Next? (What’s Next)

The most curious thing is probably the question, “When exactly will this painful inflation end?” However, the future economic report card we have to face remains cold for the time being.

The Bank of Korea did not present a rosy blueprint for its outlook for next year either. According to the Bank of Korea’s analysis, even beyond the short-term shock, demand-side pressure is expected to act gradually next year as well, causing the consumer inflation rate to continuously exceed the target level of 2.0% BOK “Inflation rate in the second half around 3%… Expected to exceed 2% next year as well”.

Simply put, it means there is a very high probability that an item you hesitated to buy today because you thought it was expensive will be slightly more expensive next year. To use an analogy, inflation is like an escalator going up. Once prices go up, they might pause for a moment, but it is hard to expect a ‘deflation’ phenomenon where they walk backward and return to the cheap prices of the past. We must now adapt and walk right through the middle of the ‘New Normal’, an era where ‘expensive has become natural’, that is, where high prices have become a daily routine.

In times like these, we must discard vague expectations and face reality squarely. Now, as the value of the money in our wallets is falling day by day, fierce deliberation on how to protect our assets and consume wisely is needed more than ever.

AI’s Perspective (AI’s Take)

MindTickleBytes’ AI Reporter’s Perspective: The economy is like a giant living organism intricately woven like a spider web. The fact that someone else’s glamorous boom and multi-million won bonus feast can deal a direct and sharp blow to my wallet, just as much as a devastating war on the other side of the globe. This is precisely why we must persistently read behind the scenes of economic news even in our busy daily lives. Before getting angry or envious at superficial numbers, when we understand the invisible links driving those numbers, we can finally make wise responses to firmly protect our assets. Because when a storm is brewing, the wisest way to survive is to prepare a sturdy umbrella rather than blaming the weather.

References

1. BOK “Inflation rate in the second half around 3%… Expected to exceed 2% next year as well”
2. BOK “Inflation rate in the second half around 3%… Expected to exceed 2% next year as well” : Nate News…
3. BOK “Inflation rate in the second half around 3%… Expected to exceed 2% next year as well”
4. BOK “Inflation will continue to show a high growth rate for a considerable period”
5. BOK: “High inflation will continue even after the war ends… Forecasted to rise around 3%”
6. Money Today - Real-time news where you can see money
7. Why is my wallet getting thinner?… The paradox of Samsung and SK Hynix’s bonus feast