South Korea inflation eases but underlying pressures persist

South Korea’s main inflation rate slowed in August for the first time in seven months and came in below forecasts, but details of the price data released on Friday reinforced views inflation would stay elevated for a while.

The Statistics Korea data showed the consumer price index (CPI) rose 5.7% in August from the same month a year ago after a 6.3% gain in July, a 24-year high. It was also slower than the median 6.1% rise tipped in a Reuters poll.

The softening in annual inflation was mostly due to a plunge in global crude prices as the data showed prices of oil products tumbling 10.0% in August from July. The weaker oil prices knocked 0.57 percentage points off the month-on-month inflation rate, resulting in a 0.1% retreat in headline CPI, the first decline since November 2020.

“The data will help ease concerns about a ‘big step’ rate increase but high core inflation and other figures show inflation pressure did not weaken much and will not do so quickly,” said Paik Yoon-min, a fixed-income analyst at Kyobo Securities.

Rhee Chang-yong, governor of the Bank of Korea, has said his bank would try not to raise interest rates by a bigger margin than the usual 25 basis points when it needs to tighten monetary policy again.

Lee Hwan-seok, a deputy governor of the central bank, said at a meeting on Friday that the fall in the inflation rate was in line with the central bank’s expectations and that inflation would stay high at 5-6% levels for some time.

The same data showed annual core inflation, which excludes volatile foods and energy prices, accelerated to 4.0% in August from 3.9% in July, the fastest since February 2009. Core inflation has not slowed since November last year.

A sub-index measuring service prices – another indicator of underlying inflation pressure – rose 4.1% in August from a year earlier, up from a 4.0% gain in July and the fastest since November 2008. It showed inflation was still spreading wider.

Rhee has said inflation would stay elevated for the time-being and that his bank would keep raising the policy interest rate having lifted it by a combined 200 basis points from record-low 0.5% since August last year.