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At the same time as economic growth is losing momentum, consumers are facing heavier inflationary pressures from global oil price hikes, and the record heat wave.
The situation is bad, with stagflation for low-income households setting in as their disposable income has decreased, and economists fearing that the economy may fall into a vicious cycle.
Stagflation is a deadly cocktail of stagnant growth and inflation. In this situation, the economy is suffering from slow growth and high unemployment with rising prices.
Official statistics do not indicate that the economy is in a phase of stagflation. Consumer prices rose 1.4 percent in the first half of the year, short of the central bank's inflation target of 2 percent.
However, there seems to be huge gap between the statistics and what consumers think.
"I can't believe that consumer prices are stable. I try not to put anything into the shopping cart that is not urgently needed, but I end up spending at least 100,000 won ($88) for a few vegetables, some meat and other food items" said Lee Hye-yeon, a housewife in Gangdong-gu, Seoul.
According to the Bank of Korea's consumer trend data for June, inflation perceived by consumers stood at 2.6 percent as prices of those closely related to their livelihoods are soaring.
Most of all, the record heat wave is raising prices of agricultural produce. According to the agriculture ministry, prices for napa cabbage, the main ingredient of kimchi, is now 2,652 won per head on average, up 28 percent from the usual price over the past few years.
Heavy rain followed by record heat has hit farmers. The price for radishes is also up 44 percent at 1,450 won, while that for tomatoes has risen 41 percent.
The global oil price hike is also adding to inflationary pressure. Dubai crude is currently traded at around $70 per barrel, soaring from $60 earlier this year. It once reached $74.4 per barrel in May.
Hong Joon-pyo, a senior researcher at the Hyundai Research Institute, said that steeply rising global oil prices may drive the economy into "real" stagflation as consumer prices are closely linked to it here, a country which totally relies on oil imports.
"If the economic slowdown continues, coupled with soaring oil prices, the possibility of stagflation will grow as consumer prices move in the same direction as global oil," he said.
"The soaring global oil prices pull up overall import prices, affecting both producer and consumer prices," he added, estimating a monthly 5 percent rise in these will pull up consumer prices by an additional 0.4 percentage points and producer prices by 1.8 percentage points.
Economy worsening
The economy, meanwhile, is getting worse. The government recently lowered its outlook for growth for this year to 2.9 percent from the previous target of 3 percent, and things are expected to get even worse in the latter half of the year.
The Hyundai Research Institute, for instance, revised down its growth outlook for the second half to 2.5 percent from its previous estimate of 2.6 percent.
It noted that the economy seems to be entering a phase of stagnation, pointing out that "the pace and the intensity of the slowdown suggests stagnation is getting closer."
The OECD composite leading indicator (CLI) for Korea, which is designed to anticipate turning points in economic activity, also recorded 99.5 for May, which is the lowest since January 2013. A reading below 100 indicates the economy is heading downward.
Workers have already been hit by the economic slump, having little left in their pockets for spending.
The disposable income of the bottom 20 percent income bracket decreased by 12.8 percent in the first quarter, while those in the 20 to 40 percentile range saw a 7.1 percent drop. Those in the 40 to 60 percentile range also saw their income fall 3 percent.
Oh Jung-geun, a professor at Konkuk University, warned that it could lead to a vicious cycle in the economy.
"The falling disposable income of low-income households will become a stumbling block for economic growth. Rising inflation is also prompting them to demand higher wages. The higher wages, in turn, will pull up consumer prices. It is enormously difficult to solve such a vicious cycle once it is formed," he said.
He said the economy may fall into stagflation.
"Corporate investment is sluggish while exports are losing momentum for growth. Overall consumer prices are rising and those related to livelihoods are leading the hike. The economy may enter another form of mini stagflation."
The government expects facility investment to grow only 1.5 percent this year, which compares with 14.6 percent last year. The growth of exports will also slow to 2.5 percent next year from 5.3 percent this year.
Kim Jin-seong, the chief economist at the Woori Financial Research Institute, however, said that inflationary pressure is not big enough to say it is stagflation.
"It depends on how you measure inflation. Though prices of commodities related to people's livelihoods have risen sharply, the overall prices of items in the consumer price basket have not risen as much. Inflationary pressure is not that strong from the demand side."
Wage hike adding to inflation
However, he said that rising costs triggered by the minimum wage hike may add to inflation. The country raised the minimum wage by 16.4 percent this year, which will be followed by 10.9 percent hike next year.
Public utility charges as well as public transportation fares are also expected to add to inflation as they are linked to global oil prices.
The price of liquefied natural gas rose 3.9 percent in July, and an additional 3 percent or 4 percent hike is expected in September.
Local governments are planning to raise bus and taxi fares in the latter half of the year or early next year, with Daejeon considering a 20 percent hike in bus fares next year.
Morgan Stanley pulled up its forecast for Brent crude oil for the second half of the year by $7.50 to $85 per barrel, citing tougher U.S. sanctions on Iran and a production increase that will fall short of expectations.
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