Bank of Korea flags upward risks to core inflation

2:02 am Monday, June 19th, 2023

SEOUL (Reuters) – South Korea’s central bank said on Monday that upward risks to core inflation were “a little high” amid strong consumption and employment trends, raising the prospect of higher inflation lasting longer than expected.

“While there is high uncertainty regarding global energy prices, domestic and global economic growth and public price hikes over the future inflation path, upward risks are assessed to be a little high when it comes to the outlook on core inflation,” the Bank of Korea (BOK) said in its biannual review of inflation conditions.

“If consumption and employment continue their robust trends, spill-over effects from accumulated cost increase pressures on core inflation may last longer than expected,” it added.

The BOK said in the report that core inflation, which remained higher than headline inflation in recent months, was also easing at a much slower pace than in past comparable periods because of sticky service prices.

South Korea’s consumer inflation slowed to a 19-month low of 3.3% in May, but core inflation remained elevated at 3.9%, staying above the headline figure for the second consecutive month.

Consumer inflation is expected to ease toward its 2% medium-term target level by mid-2023, mostly due to high base effects, before rebounding to about 3% near the end of the year, the BOK said in the report. The trend of a slower easing of core inflation is forecast to continue through the middle of this year, it added.

Compared with Canada and Australia, whose central banks recently resumed tightening interest rates after some pauses, South Korea’s housing and labour markets showed less upward price pressures, the BOK report also noted.

The BOK expects core prices will rise 3.3% this year, it said last month when it raised a February estimate of 3.0%. Overall consumer prices are expected to rise 3.5%.

The central bank held interest rates steady last month for a third straight meeting, but it also flagged it might not be done tightening.

(Reporting by Jihoon Lee; Editing by Jamie Freed)