Korea’s Inflation Eases More Than Expected While Concerns Linger

(Bloomberg) — South Korea’s inflation slowed more than expected to a range sought by policymakers, but they remain wary of a potential resurgence in price growth due to global conflicts that could spur energy costs.

Consumer prices advanced 2.8% in January from a year earlier, decelerating from 3.2% in December, the statistics office reported Friday. Economists surveyed by Bloomberg had forecast the pace would moderate to 2.9%.

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Prices excluding food and energy also rose at a more moderate pace, advancing 2.5% from a year earlier compared with 2.8% in December. That’s a faster slowdown than the 0.1 percentage-point decline expected by economists.

“The real positive news here is the cooler core price, something that has been troubling policymakers,” said Cho Yong-gu, a strategist at Shinyoung Securities. “The headline inflation will still need to come below 2.5% to prod the BOK into reconsidering its policy, and that’s unlikely to happen for the next three to four months.”

In statements following the data, both the Bank of Korea and the Finance Ministry said there’s still potential for inflation to pick up in the coming months, citing uncertainties associated with Middle East conflicts and their impact on oil prices among others.

The BOK remains focused on taming inflation to its target range of 2% and keeping it there comfortably. Governor Rhee Chang-yong said Thursday that any potential interest-rate cut would require a close reading of price data.

Data released by Statistics Korea showed transportation costs fell 0.3% from a year earlier last month, a key component weighing on inflation. Utility charges rose 1.8% in one of the slowest rises in all categories tracked by the agency. Prices of food and non-alcoholic beverages still rose 5.9% while those of clothes and shoes increased 5.8%.

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Wary of lingering price pressures, the central bank maintained its policy rate at 3.5% last month, with all board members voicing the view that there would likely be no need to take the rate higher for at least the next three months. That effectively makes 3.5% the policy rate peak.

At the same time, Rhee himself said it would be difficult to cut the rate for another six months as well, pushing back on market speculation that the BOK might join central banks including the US Federal Reserve and European Central Bank in signaling a pivot toward loosening policy.

Fed Chair Jerome Powell sought this week to cool speculation of a near-term US rate cut, maintaining that the Fed isn’t declaring a victory in its inflation fight and downplaying the chance of a rate cut in March. That prompted economists at Goldman Sachs Group Inc. to push back their forecast for the first US rate cut to May from March.

A potential rekindling of household debt is a major concern keeping Rhee from considering an early policy pivot. The BOK began its tightening cycle earlier than most peers in the developed world in 2021, citing financial imbalances among other reasons for the tightening. The housing market remains largely in the doldrums except in certain middle-class neighborhoods after the series of rate hikes that ensued. 

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That’s led to a debt crisis for some developers, including Taeyoung E&C, and stirred general concerns about financial stability, pressuring policy in the other direction. Such concerns were one reason why in their latest meeting some BOK members withdrew a previous pledge to consider another rate hike if needed.

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A tight policy can also help strengthen the local currency, helping to cap imported inflation. South Korea relies heavily on imports for energy and food. The value of South Korea’s imports fell 7.8% last month, with gas and coal leading the decline.

The central bank expects inflation to slow toward the 2% target by the end of this year and wants to see a stable reading in that range before it can consider any policy easing. The government seeks to facilitate the slowing of inflation by freezing public utility charges in the first half while tightening regulations for price hikes by businesses.

What Bloomberg Economics Says…

“The disinflation process in the last mile could be more uncertain and bumpier than it has been so far. For that reason, we think the central bank wants to see more evidence to be confident in attaining its 2% target.”

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— Hyosung Kwon, economist

For the full report, click here

Softening the pain of inflation among consumers has been a key objective for President Yoon Suk Yeol, whose party is gearing up for a parliamentary vote in April that would be crucial for his execution of policy agenda for the rest of his term that ends in 2027.

The government will wage an “all-out” effort to guide the inflation rate toward the 2% range early and firmly, Finance Minister Choi Sang-mok said. He highlighted measures to put a lid on agricultural prices ahead of family gatherings during the lunar new year holiday that begins next week.

(Updates with central bank statement in fifth paragraph)

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