Korea’s Inflation Quickens as Central Bank Mulls Rate Hike

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South Korea’s inflation unexpectedly picked up speed again in July as the central bank prepares to meet on rates amid the nation’s worst coronavirus outbreak yet.

Consumer prices rose 2.6% from a year earlier, accelerating from a 2.4% pace the prior month and matching the fastest pace of gains this year, the statistics office reported Tuesday. Economists had expected inflation to stay at June’s level. Higher transportation, food and utility prices were among the main drivers of increases in July.

The pickup in price growth comes with the Bank of Korea mulling rate hikes before the end of the year. BOK Governor Lee Ju-yeol has signaled he’s preparing to start normalizing policy to prevent asset bubbles from worsening, but he’s also said the timing depends on a recent surge in virus infections to over 1,000 new cases a day.

“This adds to the bundle of reasons the BOK has cited recently as it seeks to raise its rate,” said So Jaeyong, an economist at Shinhan Bank in Seoul. “But the BOK might feel it necessary to hold back at this month’s meeting because of the uncertainty that has emerged from the latest coronavirus outbreaks.”

The central bank meets on Aug. 26 for a rate decision.

The BOK will also look to see if the Reserve Bank of Australia indicates later Tuesday that it will walk back its tapering plan, a development that could also influence the Korean central bank’s thinking, So added. The Federal Reserve has already signaled it won’t rush to withdraw its stimulus.

Headline inflation has now exceeded the central bank’s mid-term goal of 2% every month since April, pushed up partly because of the comparison with last year’s dismal figures. The BOK sees price gains fluctuating around its target for the rest of the year before sliding lower in 2022.

A report last week showed Korea’s growth slowed last quarter from its speedy pace at the start of the year, but the central bank made clear it still sees the recovery in line with its forecasts.

A 34.9 trillion won ($30 billion) extra budget passed last month to shore up consumption could boost economic activity and add upward pressure on prices in the short-term. The stimulus aims to provide cash handouts to almost 90% of South Korean households and fuel consumer spending.

What Bloomberg Economics Says...

“The BOK had signaled plans to begin raising rates as soon as August – more to do with concerns about financial imbalances than above-target inflation. But with the country still in the midst of its worst virus wave yet, we don’t expect any moves from the BOK until the outbreak is brought under control.”

--Justin Jimenez, economist

To read the full report, click here.

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• Compared with the previous month, consumer prices rose 0.2% in July. Core inflation came in at 1.7%, versus the prior year.
• Transportation costs led the gains, jumping 7.6% from a year earlier amid rising global energy prices. Costs of housing, water, electricity and fuel also increased 2.3%.

©2021 Bloomberg L.P.