Korea inflation eases in July as core prices hit two-year high, complicating BOK rate decision
Headline inflation slowed to 2.8 percent in July, but the fastest core price growth since December 2023 is sharpening debate over whether the Bank of Korea will raise rates again this month.
Consumer price inflation eased back into the two percent range for the first time in three months in July, according to the Bank of Korea (BOK) on Tuesday.
However, core consumer price inflation — which excludes highly volatile food and energy prices — reached its highest level in two years and seven months.
The mixed signals likely complicate the BOK’s Monetary Policy Board's upcoming interest rate decision, which comes after last month's 0.25 percentage point hike.
While stronger-than-expected economic growth in the second quarter and rising core inflation strengthened the case for another rate hike, the easing consumer price index for living necessaries and lower inflation expectations supported the case for leaving rates unchanged.
Consumer prices rose 2.8 percent in July from a year earlier, according to the Ministry of Data and Statistics on Tuesday. The pace slowed by 0.4 percentage points from 3.2 percent in June’s on-year index.
On a monthly basis, consumer prices in July fell 0.2 percent compared to June, marking the first decline in eight months.
The lower inflation was driven mainly by petroleum products and agricultural, livestock and fishery goods. Inflation for petroleum products slowed to 15.5 percent from 24.7 percent after the government lowered the maximum retail price of fuel, while price growth for agricultural, livestock and fishery goods eased to 0.9 percent from 3.2 percent due to discount programs and increased shipments.
The Ministry of Finance and Economy estimated that its seventh measure, which reduced the maximum retail price of petroleum products by 150 won ($0.1) per liter, lowered inflation by about 0.3 percentage points.
Core consumer price index inflation, however, accelerated to 2.6 percent, its highest level since December 2023. Inflation for durable goods rose to 3.9 percent in July from 3.1 percent in June. Personal service prices increased 3.5 percent, while prices for personal services excluding dining out climbed 4.1 percent.
A person shops at a supermarket in downtown Seoul on Aug. 4.NEWS1
The BOK's analysis also showed that petroleum products and agricultural, livestock and fishery goods lowered inflation by 0.33 percentage points and 0.17 percentage points, respectively. However, core items pushed it up by 0.11 percentage points.
Some analysts say the main source of inflationary pressure is beginning to shift from supply-side factors to demand-driven sectors such as domestic consumption and services.
The weighted share of items whose prices increased from the previous month rose to 52.5 percent in July from 46.3 percent in June, according to iM Securities.
"Core items are expected to continue posting elevated price increases as cost shocks pass through the economy, and demand-side pressures strengthen," Lee Ji-ho, BOK deputy governor, said.
The BOK raised its benchmark interest rate to 2.75 percent from 2.50 percent on July 16. The BOK's next Monetary Policy Board meeting is scheduled for Aug. 27.
“It remains necessary to continue the tightening cycle,” BOK Gov. Shin Hyun-song said last Wednesday. “The timing and pace of any additional rate hikes will be determined after assessing inflation, economic conditions and financial stability."
Korea's real GDP grew 0.6 percent from the previous quarter and 3.7 percent from a year earlier in the second quarter.
Bank of Korea Gov. Shin Hyun-song is seen during a Monetary Policy Board meeting held in central Seoul on July 16.BANK OF KOREA
Improving terms of trade, driven by higher semiconductor export prices, lifted real gross domestic income by 3.6 percent quarter on quarter and 15.6 percent on year, far outpacing GDP growth. The BOK believes that if stronger household income translates into higher consumer spending, demand-driven inflationary pressure could intensify.
The fading base effect from telecommunications fee discounts, which is expected to add about 0.6 percentage points to August's inflation rate, also strengthens the case for another rate hike.
On-year inflation for everyday necessities slowed to 2.5 percent in July from 3.4 percent in June.
Inflation expectations — the outlook of inflation for a year ahead — edged down to 2.7 percent in July from 2.8 percent in June. The local currency has also strengthened against the dollar in recent weeks.
Economists remain divided over whether the pickup in core inflation reflects broadening demand-side pressure or temporary factors such as strong travel demand and higher semiconductor prices.
"The market's baseline expectation is for the BOK to hold rates in August and raise them in October, but an August hike remains a possibility as core inflation continues to rise and household lending at the country's five largest banks increased sharply in July," Choi Ji-wook, senior official at State Street Markets, said. "The direction of global oil prices and import and export prices will also need to be watched before this month's Monetary Policy Board meeting."
Another analyst, however, said an August rate hike remains unlikely.
“Seasonal demand during the summer vacation period pushed up prices for personal services excluding dining out,” Lim Jae-kyun, an analyst at KB Securities, said. "Demand-driven inflationary pressure and second-round effects from higher oil prices remain limited, so the likelihood of a second consecutive rate hike in August remains low."
BY KIM WON [lee.soojung1@joongang.co.kr]
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
