Bank of Korea: Inflation to Remain High for Extended Period

The Bank of Korea anticipates that consumer prices will continue their elevated trajectory, projecting a rise of approximately 3% in the second half of the year. Core inflation, excluding food and energy, is expected to hover around 2.7%. These forecasts were detailed in the central bank's "Inflation Stabilization Goal Operation Status Review."

Geopolitical instability, specifically the conflict between the US and Iran, is a primary driver of sustained high oil prices. Even if a resolution is reached, the Bank of Korea notes that rebuilding infrastructure and restocking efforts will prevent oil prices from immediately returning to pre-conflict levels. This prolonged period of high oil costs is expected to permeate other sectors, pushing up core inflation.

Beyond external factors, domestic demand is also poised to contribute to inflation. The central bank forecasts that improved consumption, fueled by income and asset effects from robust semiconductor exports, will gradually increase demand pressure. Furthermore, if wage increases spread beyond the IT sector to other industries, it could amplify both cost-push and demand-pull inflationary pressures.

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Even if the US-Iran peace talks are finally settled after mid-June, it will take considerable time for international oil prices to return to pre-war levels due to infrastructure restoration and countries' strategic reserve demand.

The Bank of Korea had previously projected a 2.7% consumer inflation rate for the year, significantly above its 2.0% target. This has been a key factor in discussions surrounding the need to raise the benchmark interest rate, currently at 2.50%. Inflation in the first half of the year already averaged 2.4%, largely due to the impact of the Middle East conflict on global oil prices.

Looking ahead to next year, while the upward pressure from oil prices is expected to ease, demand-side pressures are projected to intensify. The central bank anticipates that both consumer and core inflation will remain above the target level. Previous forecasts for 2025 placed consumer inflation at 2.3% and core inflation at 2.3%. The bank's analysis suggests that a prolonged period of high oil prices (over three months) could lead to a 0.1% or greater increase in core inflation within five months, indicating a significant risk of broader price increases.

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Going forward, demand pressure is expected to gradually expand due to improved consumption stemming from income and asset effects from the favorable semiconductor export environment.