Bank of Korea Sees Faster 2021 Inflation After November Surprise
(Bloomberg) -- The Bank of Korea said it expects inflation this year to come in above its upward revision of just a week ago as consumer price gains exceeded all estimates in November, accelerating to the fastest pace since 2011.
Consumer prices rose 3.7% from a year earlier, the statistics office said Thursday, compared with a median forecast of 3.1%. That extended the run of gains above the Bank of Korea’s 2% target to an eighth straight month, validating the central bank’s two interest-rate increases since August and suggesting further tightening ahead.
In a statement after the release, the BOK said 2021 inflation may be “somewhat” higher than the 2.3% it predicted Nov. 25. Price gains will gradually cool as oil prices ease and the government’s fuel tax cut feeds through to consumers, it said. But demand pressures and supply bottlenecks will keep inflation above target for a considerable time, the central bank said.
The won appreciated 0.1% versus the dollar to 1,177.65 as of 11:18 a.m. in Seoul. The three-year government bond yield fell three basis points to 1.78%.
Korea is among a growing cohort of economies struggling to contain prices. Accelerating inflation is a risk to Korea’s recovery, threatening to undermine households’ spending power and erode corporate profits.
Further complicating the outlook for growth and prices is the spread of the omicron variant, with the government reportedly mulling tighter virus restrictions in response. Korea has seen daily virus caseload hit record highs and confirmed its first omicron cases on Wednesday.
If the new strain were to trigger a renewed round of lockdowns worldwide, supply chain disruptions would only worsen and add to price pressures.
A separate report from the BOK today showed the economy expanded 0.3% in the third quarter from the April-June period, matching the initial estimate. The central bank said construction investment was scaled back from its earlier reading, but higher exports and private consumption left the overall outcome unchanged.
With inflation expectations also on the rise, BOK Governor Lee Ju-yeol is concerned that the trend could set off demands for faster wage increases that may broaden pressures. Consumer prices last month were driven by higher oil and food costs, while services also ticked up amid loosened virus rules.
While most economists agree the BOK needs to tighten further to counter inflation risks, their forecast timing varies due to uncertainties surrounding the pandemic.
“Inflation will probably remain above 3% until January,” said An Young-jin, an economist for SK Securities Co. “We expect another rate hike by the BOK to 1.25% in January, and another in July, though much would depend on the virus situation.”
Goldman Sachs Group Inc. is more cautious, expecting a “gradual” pace of policy normalization amid a deteriorating pandemic situation. Its economists see the next rate hike taking place in April.
In a shift from its earlier view that price increases were transitory, the BOK last week raised its forecast inflation for 2022 to 2% from 1.5%, meaning it expects price gains to exceed, or at least hover around, the target through next year.
Key drivers of the 3.7% year-on-year rise in headline CPI were:
- Transportation costs, which added 1.38 percentage points
- Food and non-alcoholic drinks contributed 0.89 point; and
- Restaurants and accommodations contributed 0.51 point
From a month earlier, Korea’s consumer prices rose 0.4%.
Core inflation, which excludes agriculture and oil prices, came in at 2.3% from a year earlier.
©2021 Bloomberg L.P.