Korea: Inflation rises in May
Consumer prices increased 0.66% in May over the previous month, which was below April’s 0.74% rise. May’s result marked the weakest reading since February. The slowdown was largely driven by a slower increase in prices for housing and utilities. In addition, price pressures for transportation plus recreation and culture grew at a softer pace.
Inflation increased to 5.4% in May from April’s 4.8%. May’s reading was the highest inflation rate since August 2008. Annual average inflation rose to 3.5% in May (April: 3.3%). Finally, core inflation rose to 4.1% in May, from the previous month’s 3.6%.
The reading exceeded market expectations, with inflation now sitting even further above the Bank of Korea’s (BOK) 2.0% inflation target. Along with rising core inflation, this suggests an increased contribution of demand to current price pressures as the economy reopens from the Covid-19 restrictions imposed earlier in the year. This said, price pressures still remain largely driven by supply factors, in particular by higher commodity prices. As a result, with commodity prices set to cool by the end of the year and demand tempered by the rising cost of living, inflation should cool toward the end of the year.
Analysts at ANZ commented:
“Considering various forces such as a robust labour market, high commodity prices, and expansionary fiscal policies, we believe inflation will remain elevated for longer and overwhelm the impact of the recent reduction in import tariffs.”
Meanwhile, analysts at DBS expect rising inflation to lead the BOK to raise interest rates by 25 basis points consecutively at its next two meetings. That said:
“We still think the BOK’s hawkishness will fade towards the end of this year […] The model-implied CPI will ease slightly to about 3.5% by December 2022 and further to 2.5% by December 2023. Should the disruptive factors dissipate (supply chain pressure, China lockdown, price speculations), actual CPI could ease more notably than the model-implied CPI in 2023. Even if these factors remain in place and CPI numbers remain higher than forecasted, persistent monetary policy tightening would not be the best way to tackle these supply-side inflation problems, in our view.”