Inflation in Korea

Korea - Inflation

Inflation comes in at highest level since November 1998 in June

Consumer prices rose 0.61% from the previous month in June, a smaller increase than the 0.66% rise seen in May. June's result marked the weakest reading since February. Looking at the details of the release, food and non-alcoholic beverages prices dropped in June compared to the previous month, while price pressures for transportation picked up pace.

Inflation came in at 6.0% in June, which was up from May’s 5.4%. June's figure marked the highest inflation rate since November 1998. Meanwhile, the trend pointed up, with annual average inflation coming in at 3.8% in June (May: 3.5%). Finally, core inflation rose to 3.9% in June, from May’s 3.4%.

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 mostly driven by supply factors, in particular by higher commodity prices. As a result, with commodity prices set to cool by the end of 2022 and demand tempered by the rising cost of living, inflation should cool toward the end of the year.

ING’s Min Joo Kang commented:

“There are several reasons why inflation will rise further in the coming months. 1) Electricity and gas prices have increased this month, 2) Fuel prices are expected to increase despite the expanded fuel tax cut from 30% to 37%, and 3) The summer vacation season begins from late July, which will likely pressure travel/leisure prices. However, we expect monthly gains to decelerate, and the headline CPI will start to come down in 4Q22.”

Our panel forecasts inflation to average 4.5% in 2022, which is up 0.7 percentage points from last month’s forecast. In 2023, inflation is seen averaging 2.4%.