South Korea's Inflation Expected to Rise in August on Base Effect, BOK Says
Key Takeaways
- •South Korea's annual consumer price growth slowed to 2.8 percent in July, marking the first time in three months inflation fell below the 3 percent threshold.
- •The Bank of Korea projects inflation will rebound in August due to a base effect created by mobile carrier discount programs from August 2023 that artificially depressed telecom prices.
- •Core inflation, which excludes volatile food and energy costs, accelerated to 2.6 percent year-on-year in July, its fastest pace since December 2023, suggesting price pressures are broadening beyond energy and food.
- •Oil product price increases decelerated to 15.5 percent year-on-year in July from 24.7 percent in June, while agricultural product prices declined 2.2 percent compared to a year earlier.
- •The BOK has held its benchmark interest rate at 3.50 percent since early 2023 as it balances inflation control against concerns over weak domestic consumption and construction activity.
South Korea's central bank said Tuesday that inflation is expected to edge up in August from the previous month, driven largely by a statistical base effect, while ongoing tensions in the Middle East continue to exert cost-push inflationary pressure on the economy.
The Bank of Korea (BOK) assessment came as government data released the same day showed consumer prices rose 2.8 percent in July from a year earlier, marking the first time in three months that inflation fell below the 3 percent threshold.
"Consumer prices in July slowed as prices of petroleum and agricultural products fell," Deputy Governor Lee Ji-ho said during a meeting convened to review inflation trends. "However, core inflation rose slightly due to higher prices of durable goods amid cost-push inflation."
Lee indicated that the reprieve may be short-lived. "In August, inflation is projected to accelerate, driven by the base effect of large-scale discount programs offered by some mobile carriers last year," he added. Because those discounts artificially depressed telecom service prices in August 2023, the year-on-year comparison for the same month this year will mechanically register a larger increase, even if underlying prices have not changed substantially.
The July slowdown was attributed to stabilizing oil prices following a brief ceasefire in the Middle East, as well as government-imposed price caps on petroleum products designed to shield consumers from elevated energy costs. South Korea, which imports nearly all of its crude oil and natural gas, is particularly sensitive to swings in global energy markets, making Middle East developments a recurring variable in domestic price trends.
Oil product prices climbed 15.5 percent year-on-year in July, a high level but a notable deceleration from the 24.7 percent annual increase recorded in June. Agricultural product prices, meanwhile, declined 2.2 percent compared with the same month a year earlier.
Core inflation, which strips out volatile food and energy costs and is closely watched by policymakers as a gauge of underlying price pressures, advanced 2.6 percent year-on-year in July — its sharpest increase since December 2023, when it posted 2.8 percent growth. The acceleration in core inflation suggests that price pressures have broadened beyond energy and food into services and manufactured goods, complicating the policy outlook.
The BOK's inflation target is 2 percent over a medium-term horizon. The bank has maintained a cautious monetary policy stance — holding its benchmark rate steady at 3.50 percent since early 2023 — as it balances the need to contain inflation against concerns about economic growth, particularly given weakness in domestic consumption and construction activity.
(Yonhap)
