South Koreans’ love for labels is driving local inflation more strongly than in other developed nations, making it harder for monetary policy to rein in the costs of living, a central bank study said.

“High preference” for luxury clothes among South Koreans undermines price elasticity and helps global distributors consolidate their lock on domestic markets, according to a study led by Bank of Korea researcher Im Woong-ji that was released on Tuesday.

Luxury sales are concentrated in department stores that charge higher fees while foreign apparel makers often set their prices higher in South Korea, it said. Only 3% of purchases by department stores are direct from the makers, it added.

The study compared South Korea to other members of the Organisation for Economic Co-operation and Development and cited a Morgan Stanley report last year that characterised South Korea as the world’s biggest per-capita spender on luxury brands.

The report estimated South Koreans’ spending on personal luxury goods rose by 24% in 2022, equivalent to US$16.8 billion at that time and equating to about US$325 for every man, woman and child. As a market, South Korea is as important as Japan for luxury goods makers, with its nationals accounting for 10% or more of total retail sales by top-end brands including Prada SpA, Moncler SpA, and Burberry Group Plc, it said.

Monetary policy can only do so much when prices stay high due to the way products are distributed, the BOK study said, a view consistent with remarks by Governor Rhee Chang-yong at a meeting to review the BOK’s efforts to bring inflation down to its 2% target.

“Our high cost of living compared to other countries is a problem that cannot be solved by monetary policy alone,” he said Tuesday. “It’s time to think about what structural reforms are needed to reduce it.”

Social media like Instagram have also fueled the zeal for luxury brands in South Korea, which has one of the world’s most densely connected broadband networks. The nation ranked No 3 in the world by active social media users at 91.2% of the population, according to a 2022 report from Hootsuite.

Another structural source of inflationary pressure is agriculture, the BOK study said. There is only 0.3ha of farming land per person in South Korea, among the smallest ratios in the OECD, while climate change and ageing in rural areas threaten to make the industry less productive, it said.

Meanwhile, the impact of utility bills tends to be lighter in South Korea due to government subsidies, it said.

In a separate report, the central bank cautiously forecast Tuesday that headline inflation will trend slower by year’s end, as expected. The BOK predicted in May that consumer prices will grow 2.6% this year from a year ago, keeping its earlier forecast unchanged.

  - Bloomberg