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🇰🇷 South Korea /Economy & Trade

South Korea's inflation dips to 2% range, but core prices and service costs show upward risks

From Hankyoreh · () Korean

Translated from Korean, summarized and contextualized by DistantNews.

At a glance

News Named sources Context piece
  • South Korea's consumer price inflation fell to 2.8% in July, down from over 3% in previous months, due to government policies like price caps on fuel and discounts on agricultural products.
  • However, core inflation, which excludes volatile items like food and energy, rose to 2.6%, indicating persistent upward price pressures, particularly in services.
  • Analysts predict core inflation will remain elevated due to the stickiness of service prices and strong demand, potentially influencing the Bank of Korea's decision to maintain its interest rate hike stance.

South Korea's consumer price inflation eased to 2.8% in July, a welcome drop from the 3% range seen in May and June. This moderation is partly attributed to government interventions, including price caps on gasoline and diesel, and discounts on agricultural and fishery products. The latter saw their price increase slow to just 0.9%.

Considering the time lag and strong demand-side inflationary pressures, it will likely remain at around 2.8-3.0% for a considerable period.

— Kim Jin-wookA Citigroup economist commenting on the outlook for core inflation.

Despite the overall cooling, underlying inflationary pressures remain a concern. Core inflation, which strips out volatile food and energy prices to gauge future trends, actually climbed to 2.6% from 2.5% the previous month. Service prices, in particular, are driving this trend, rising 0.3% from June and contributing significantly to the overall inflation rate. Personal services saw a substantial 3.5% year-on-year increase, far outpacing general inflation. Factors like rising demand for overseas group tours (up 20%) and laundry services (up 13.9%) reflect this persistent service sector inflation.

Experts warn that service prices, known for their resistance to falling once they rise, will likely keep core inflation elevated. Kim Jin-wook, a Citigroup economist, forecasts core inflation to hover between 2.8% and 3.0% for a considerable period, citing time lags and strong demand-side pressures. Yang Jun-seok, a professor of economics at Catholic University, noted that the effects of earlier high oil prices are now filtering into manufactured goods and services, and the inherent stickiness of service prices means a significant downturn is unlikely soon.

Higher oil prices from a few months ago have transferred to manufactured goods and services, and service prices have downward rigidity, so there's unlikely to be a significant decrease anytime soon.

— Yang Jun-seokA professor of economics at Catholic University explaining the persistence of core inflation.

This persistent core inflation is expected to reinforce the Bank of Korea's commitment to raising interest rates. Bank Governor Shin Hyun-song emphasized that the central bank prioritizes core inflation over headline figures and views continued rate hikes as the most rational approach to curb it.

We are looking more at core inflation than headline consumer price index. We believe maintaining the rate hike stance going forward to bring down core inflation is the most rational approach.

— Shin Hyun-songGovernor of the Bank of Korea explaining the central bank's monetary policy focus.
DistantNews Editorial

Originally published by Hankyoreh in Korean. Translated, summarized, and contextualized by our editorial team with added local perspective. Read our editorial standards.

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