South Korea inflation eases but underlying pressures persist

The Statistics Korea data showed the consumer price index (CPI) rose 5.7% in August from the same month a year ago after a 6.3% gain in July, a 24-year high. It was also slower than the median 6.1% rise tipped in a Reuters poll.

The softening in annual inflation was mostly due to a plunge in global crude prices as the data showed prices of oil products tumbling 10.0% in August from July. The weaker oil prices knocked 0.57 percentage points off the month-on-month inflation rate, resulting in a 0.1% retreat in headline CPI, the first decline since November 2020.

“The data will help ease concerns about a ‘big step’ rate increase but high core inflation and other figures show inflation pressure did not weaken much and will not do so quickly,” said Paik Yoon-min, a fixed-income analyst at Kyobo Securities.

Rhee Chang-yong, governor of the Bank of Korea, has said his bank would try not to raise interest rates by a bigger margin than the usual 25 basis points when it needs to tighten monetary policy again.

Lee Hwan-seok, a deputy governor of the central bank, said at a meeting on Friday that the fall in the inflation rate was in line with the central bank’s expectations and that inflation would stay high at 5-6% levels for some time.

The same data showed annual core inflation, which excludes volatile foods and energy prices, accelerated to 4.0% in August from 3.9% in July, the fastest since February 2009. Core inflation has not slowed since November last year.

A sub-index measuring service prices – another indicator of underlying inflation pressure – rose 4.1% in August from a year earlier, up from a 4.0% gain in July and the fastest since November 2008. It showed inflation was still spreading wider.

Rhee has said inflation would stay elevated for the time-being and that his bank would keep raising the policy interest rate having lifted it by a combined 200 basis points from record-low 0.5% since August last year.