Bank of Korea warns underlying inflation will keep rising

The Bank of Korea expects underlying inflation to maintain a persistent upward trend, keeping consumer prices on a high trajectory despite some temporary factors easing in September.

At a meeting chaired by Deputy Governor Lee Ji-ho, the central bank reviewed recent price movements and the outlook. Lee said August consumer inflation accelerated from the previous month because a base effect from last year’s telecommunications discounts faded. Lower maximum prices for petroleum products and the government’s discounts on agricultural, livestock and fishery goods limited the increase.

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September consumer inflation is expected to be lower than in August as the base effect disappears, but a persistent upward trend is expected to continue, centered on underlying items.

Underlying inflation rose more sharply as prices for durable goods increased and base effects exerted a strong influence. Consumer prices climbed 3.1% in August from a year earlier, up from 2.8% in July. Underlying inflation reached 3.4%, compared with 2.6% the previous month, while living-cost inflation rose to 3.2% from 2.5%.

Lee said September’s headline inflation rate would likely fall below August’s level as the base effect disappeared. He nevertheless warned that underlying items would continue to show a steady rise. The central bank also pointed to continuing uncertainty related to the war in the Middle East, the possible pass-through of cost shocks and stronger demand-side pressure as reasons to monitor prices closely.

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We expect consumer prices to continue rising at a high rate, centered on underlying inflation, amid still-high uncertainty related to the war in the Middle East, the pass-through of cost shocks and expanding demand-side pressure.