(Source: Unsplash)
By Aubrey Kim, New York Correspondent
Driven by Falling Oil and Agricultural Prices, VAT Hike Debate Gains Attention
In May 2025, South Korea’s consumer price index (CPI) rose by 1.9% year-on-year, marking the first time in five months that inflation has fallen into the 1% range. After maintaining rates above 2% between January and April, the recent slowdown was largely attributed to declining global oil prices and lower agricultural product prices. Despite this moderation, perceived inflation among consumers remains high. Meanwhile, calls from global organizations like the IMF and OECD for South Korea to raise its value-added tax (VAT) are drawing growing attention to potential tax reform.
Oil and Agricultural Prices Drive May Inflation Down to 1.9%
According to Statistics Korea’s “May 2025 Consumer Price Trends” released on June 4, the consumer price index stood at 116.27 (based on 2020 = 100), up 1.9% from the same month last year. This marks a return to the 1% inflation range for the first time since December 2024, following a consistent 2% range from January through April.
The primary driver of this slowdown was a significant drop in international oil prices. Crude oil fell from $84 in May 2024 to $63.7 in May 2025—a 24.2% decrease. As a result, petroleum product prices dropped by 2.3% year-on-year, contributing to a 0.09 percentage point reduction in overall inflation. This marks the second consecutive month of decline in petroleum prices following April’s 1.7% drop.
Agricultural prices also saw a sharp fall. Vegetable prices dropped by 5.4%—the largest decline in 37 months. Key items like apples (-11.6%), Korean melons (-27.3%), green onions (-33.4%), tomatoes (-20.6%), cabbage (-15.7%), and pears (-14.4%) saw significant price reductions. Overall, agricultural product prices declined by 4.7% year-on-year.
Food, Energy, and Services Still Burdening Consumers
Despite the headline inflation rate easing, the cost of living remains a concern. The Living Necessities Price Index rose by 2.3%—higher than the overall inflation rate. While the Fresh Food Index fell by 5.0%, categories more directly felt by consumers—like dining out, processed foods, and utility costs—remained elevated:
Livestock Products: Prices rose 6.2%, contributing 0.21 percentage points to inflation.
Processed Foods: Up 4.1%, adding 0.35 points.
Services: Rose 2.3%; personal services climbed 3.2%, contributing 1.08 points. Eating out also increased by 3.2%.
Industrial Goods: Up 1.4%.
Rents: Rose 0.8%.
Public Services: Up 1.3%.
Electricity, Gas, and Water: Increased by 3.1%. City gas (6.9%), district heating (9.8%), and tap water (3.8%) are pushing household energy costs higher.
In short, while oil and agricultural prices declined, inflationary pressure remains strong in essential daily life sectors.
Core Inflation and Perceived Stability Lag Behind Headline Trends
Core inflation—which excludes volatile items such as food and energy—rose by 2.3%. The OECD’s definition of core inflation (excluding food and energy) registered a 2.0% increase, slightly down from April (2.1%), but still maintaining a 2%+ trend.
The Living Necessities Price Index, covering 144 frequently purchased and high-expenditure items, rose by 2.3%. While the Fresh Food Index dropped 5.0%, subcategories were mixed: fresh vegetables (-5.5%) and fresh fruit (-9.7%) fell, while fresh fish and seafood rose by 5.4%.
IMF, OECD Urge VAT Hike as Tax Reform Debate Heats Up
As inflation shows signs of stabilizing, global institutions are renewing their calls for South Korea to raise its VAT rate. In its annual report, the IMF noted that South Korea’s VAT rate (10%) remains significantly below the advanced economy average of 18.5–19.2%. It recommended increasing the rate and scaling back exemptions to strengthen fiscal health and boost revenue.
The VAT has remained at a flat 10% since its introduction in 1977. As of 2023, countries like the UK and France had VAT rates of 20%, Italy 22%, and Germany 19%. Only Canada (5%) and Switzerland (7.7%) had lower rates among OECD countries.
Despite these recommendations, VAT hikes remain politically and socially sensitive due to their regressive nature—disproportionately affecting low-income households. The South Korean government has so far ruled out any immediate plans to raise the VAT, citing concerns over its inflationary impact. However, growing structural fiscal pressures—such as an aging population, rising welfare expenditures, and declining tax revenue—could reignite the debate in the near future.
Expert Analysis and Outlook
Experts caution that May’s inflation slowdown may only be temporary, largely driven by declines in energy and agricultural prices. Essential costs for food, dining, and utilities remain high, pointing to a gap between the official CPI and what consumers actually feel. Both core and living cost indices continue to rise at a 2% pace, suggesting that perceived inflation remains elevated.
Meanwhile, the IMF and OECD’s calls for VAT reform are seen not merely as revenue measures but as part of a broader reassessment of Korea’s fiscal structure. If VAT discussions gain traction, the implications could ripple through inflation, consumption, and income distribution.
Conclusion
In May 2025, South Korea’s inflation eased to 1.9%, renewing hopes for price stability. However, daily essentials such as dining out, food, and energy continue to strain household budgets. As international pressure for VAT reform intensifies, careful deliberation from the government and policymakers will be essential. The path of inflation and potential tax reform will be critical in shaping economic sentiment and consumer well-being going forward.
Copyright © The Value Chain Times. All rights reserved. Unauthorized reproduction, redistribution, and use for AI training are strictly prohibited.
[The Value Chain Times = Aubrey Kim, New York Correspondent]
(Source: Unsplash)
By Aubrey Kim, New York Correspondent
Driven by Falling Oil and Agricultural Prices, VAT Hike Debate Gains Attention
In May 2025, South Korea’s consumer price index (CPI) rose by 1.9% year-on-year, marking the first time in five months that inflation has fallen into the 1% range. After maintaining rates above 2% between January and April, the recent slowdown was largely attributed to declining global oil prices and lower agricultural product prices. Despite this moderation, perceived inflation among consumers remains high. Meanwhile, calls from global organizations like the IMF and OECD for South Korea to raise its value-added tax (VAT) are drawing growing attention to potential tax reform.
Oil and Agricultural Prices Drive May Inflation Down to 1.9%
According to Statistics Korea’s “May 2025 Consumer Price Trends” released on June 4, the consumer price index stood at 116.27 (based on 2020 = 100), up 1.9% from the same month last year. This marks a return to the 1% inflation range for the first time since December 2024, following a consistent 2% range from January through April.
The primary driver of this slowdown was a significant drop in international oil prices. Crude oil fell from $84 in May 2024 to $63.7 in May 2025—a 24.2% decrease. As a result, petroleum product prices dropped by 2.3% year-on-year, contributing to a 0.09 percentage point reduction in overall inflation. This marks the second consecutive month of decline in petroleum prices following April’s 1.7% drop.
Agricultural prices also saw a sharp fall. Vegetable prices dropped by 5.4%—the largest decline in 37 months. Key items like apples (-11.6%), Korean melons (-27.3%), green onions (-33.4%), tomatoes (-20.6%), cabbage (-15.7%), and pears (-14.4%) saw significant price reductions. Overall, agricultural product prices declined by 4.7% year-on-year.
Food, Energy, and Services Still Burdening Consumers
Despite the headline inflation rate easing, the cost of living remains a concern. The Living Necessities Price Index rose by 2.3%—higher than the overall inflation rate. While the Fresh Food Index fell by 5.0%, categories more directly felt by consumers—like dining out, processed foods, and utility costs—remained elevated:
Livestock Products: Prices rose 6.2%, contributing 0.21 percentage points to inflation.
Processed Foods: Up 4.1%, adding 0.35 points.
Services: Rose 2.3%; personal services climbed 3.2%, contributing 1.08 points. Eating out also increased by 3.2%.
Industrial Goods: Up 1.4%.
Rents: Rose 0.8%.
Public Services: Up 1.3%.
Electricity, Gas, and Water: Increased by 3.1%. City gas (6.9%), district heating (9.8%), and tap water (3.8%) are pushing household energy costs higher.
In short, while oil and agricultural prices declined, inflationary pressure remains strong in essential daily life sectors.
Core Inflation and Perceived Stability Lag Behind Headline Trends
Core inflation—which excludes volatile items such as food and energy—rose by 2.3%. The OECD’s definition of core inflation (excluding food and energy) registered a 2.0% increase, slightly down from April (2.1%), but still maintaining a 2%+ trend.
The Living Necessities Price Index, covering 144 frequently purchased and high-expenditure items, rose by 2.3%. While the Fresh Food Index dropped 5.0%, subcategories were mixed: fresh vegetables (-5.5%) and fresh fruit (-9.7%) fell, while fresh fish and seafood rose by 5.4%.
IMF, OECD Urge VAT Hike as Tax Reform Debate Heats Up
As inflation shows signs of stabilizing, global institutions are renewing their calls for South Korea to raise its VAT rate. In its annual report, the IMF noted that South Korea’s VAT rate (10%) remains significantly below the advanced economy average of 18.5–19.2%. It recommended increasing the rate and scaling back exemptions to strengthen fiscal health and boost revenue.
The VAT has remained at a flat 10% since its introduction in 1977. As of 2023, countries like the UK and France had VAT rates of 20%, Italy 22%, and Germany 19%. Only Canada (5%) and Switzerland (7.7%) had lower rates among OECD countries.
Despite these recommendations, VAT hikes remain politically and socially sensitive due to their regressive nature—disproportionately affecting low-income households. The South Korean government has so far ruled out any immediate plans to raise the VAT, citing concerns over its inflationary impact. However, growing structural fiscal pressures—such as an aging population, rising welfare expenditures, and declining tax revenue—could reignite the debate in the near future.
Expert Analysis and Outlook
Experts caution that May’s inflation slowdown may only be temporary, largely driven by declines in energy and agricultural prices. Essential costs for food, dining, and utilities remain high, pointing to a gap between the official CPI and what consumers actually feel. Both core and living cost indices continue to rise at a 2% pace, suggesting that perceived inflation remains elevated.
Meanwhile, the IMF and OECD’s calls for VAT reform are seen not merely as revenue measures but as part of a broader reassessment of Korea’s fiscal structure. If VAT discussions gain traction, the implications could ripple through inflation, consumption, and income distribution.
Conclusion
In May 2025, South Korea’s inflation eased to 1.9%, renewing hopes for price stability. However, daily essentials such as dining out, food, and energy continue to strain household budgets. As international pressure for VAT reform intensifies, careful deliberation from the government and policymakers will be essential. The path of inflation and potential tax reform will be critical in shaping economic sentiment and consumer well-being going forward.
Copyright © The Value Chain Times. All rights reserved. Unauthorized reproduction, redistribution, and use for AI training are strictly prohibited.
[The Value Chain Times = Aubrey Kim, New York Correspondent]