South Korea’s inflation eased for a fifth month in June, bolstering the case for the central bank to hold its policy rate again when officials meet next week.
Consumer prices rose 2.7% in June from the prior year, the least since September 2021, according to data from the statistics office Tuesday. That was below economists’ expectations for a 2.8% increase. Core inflation, which excludes oil and agricultural prices, rose 4.1%, the least since May 2022 and marking a third straight month of deceleration.
While the slowdown in headline inflation may be welcome news for Bank of Korea officials, it remains above their 2% target and core price pressures have proven sticky. The figures — the final major economic data before the central bank meets to set policy July 13— provide scope for policymakers to maintain their pause on the key rate.
“Inflation is seen easing quickly,” said Ha Keon-hyeong, an economist at Shinhan Securities Co. in Seoul. “But the BOK is likely to keep its hawkish stance for the time being despite the moderation in prices and concerns over an economic slowdown, as its looks out for the risk of other major central banks’ potential rate hikes.”
The BOK has kept its policy rate unchanged at 3.5% for the past three meetings, awaiting a sustained deceleration in the pace of price increases. At the same time, the country’s economic growth has weakened amid a slowdown in global demand for goods. Risks have mounted as the recovery in China has been slower than expected.
While South Korea posted its first trade surplus in 16 months in June and overall shipments fell the least since October, chip exports and shipments to China— the country’s largest trading partner— extended declines. Future improvements in activity largely rely on a sustained pickup in China’s economy.
The surprising strength of core inflation has complicated the picture. Those prices, which exclude food and oil, have been slower to ease and show that underlying pressures remain firmly in the pipeline. The BOK in June flagged the risk that core inflation will persist for longer than expected, boosted by a tight labor market and local demand.
The persistence of core price growth has kept Governor Rhee Chang-yong cautious. He reiterated in June the need to see a sustained slowdown in inflation before pivoting policy. Meanwhile, the BOK expects prices to pick up again later this year amid potential utility price hikes and oil price changes.
--With assistance from Myungshin Cho.
(Updates with chart, analyst comment starting in fourth paragraph.)
