Korea Inflation Exceeds Estimate, Backing Further Rate Hike

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South Korea’s inflation came in faster than expected in September, adding support to the view that the central bank will raise interest rates again this year.   

Consumer prices rose 2.5% from a year earlier, the statistics office reported Wednesday. Economists had expected the rate to edge down to 2.4% from 2.6% in August.

The report underscores growing price pressures in the economy as the recovery continues, and was supported further by higher energy and food prices ahead of the national Chuseok holiday. Inflation has now topped the Bank of Korea’s 2% target for a sixth straight month, bolstering the case for another hike at one of its two remaining decisions this year, including one next week.

“It’s not a situation where the BOK should rush a rate hike, but it’s still likely to raise rates in November,” said Park Hee-chan, an economist at Mirae Asset Daewoo. 

Korea’s inflation has bucked expectations for a slowdown since a new wave of the coronavirus struck in July as consumers showed resilience in spending. The government’s cash handout to more than 80% of the country’s households starting last month likely also supported spending and prices. 

In a separate Wednesday statement, the finance ministry said it expects inflation to quicken in October, lifted by a low base a year earlier when the government’s mobile fee subsidies lowered the headline gauge to just 0.1%. 

What Bloomberg Economics Says...

“We expect inflation to remain above target through year-end, before easing toward the start of 2022.”

-- Justin Jimenez, Asia Economist.

Read full note here. 

The BOK has said that price gains would fluctuate around its target of 2% for the rest of the year before sliding lower in 2022. After raising rates in August in an attempt to avert asset bubbles, the central bank has made it clear that further hikes are due. Economists who see a rate change this year view November as the likely timing, rather than a back-to-back increase on Oct. 12.

Other details in the report include:

• Compared with the previous month, consumer prices rose 0.5% in September
• South Korea’s core inflation came in at 1.9%, versus the prior year
• Transportation costs climbed the most, up 8.5% from a year earlier as energy prices soared globally, adding 0.9 percentage points to the headline gauge
• The cost of foods and non-alcoholic beverages increased 3.3% in September, contributing another 0.5 percentage points
• Utility costs increased 2.2%, while the prices of house-related products and service rose 4.1%

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