Korea Inflation Hits Four-Year High as Pandemic’s Grip Eases

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South Korea’s inflation accelerated in April to the fastest pace since 2017 amid a broadening economic recovery, but the pickup is unlikely to stoke concerns over excessive price pressure as calendar effects helped buoy the gains.

Inflation rose to 2.3% in April, data from the statistics office showed Tuesday, rapidly increasing from 1.5% in March. Economists expected consumer prices to increase 2.1% from a year earlier.

Korea Inflation Hits Four-Year High as Pandemic’s Grip Eases

The highest year-on-year inflation since August 2017 comes after exports rose last month at the fastest pace in a decade. South Korea’s gross domestic production also surpassed its pre-virus peak in the first quarter, a milestone not yet reached in most economies.

While there were signs of improving domestic demand supporting inflation, the boost was largely driven by higher commodity and energy prices, which had plunged a year earlier as the pandemic spread across the world. Korea’s consumer prices fell 0.3% in May 2020, suggesting favorable base effects will remain in play for the coming months.

“What matters is how income-driven the inflation is, but with the labor market still not fully recovered, it’s hard to tell how much of that comes from the demand side,” said Park Chong-hoon, an economist at Standard Chartered Bank in Seoul. “It’s still too early to view this inflation as structural.”

Tuesday’s report also showed inflation topped the BOK’s 2% target for the first time since 2018. But the central bank is unlikely to see this as a sign of mounting price pressure, with Governor Lee Ju-yeol saying last month that inflation will moderate after fluctuating around 2% this quarter.

What Bloomberg Economics Says..

With the inflation acceleration in the coming months “likely to be largely driven by base effects from last year’s oil price slump, the central bank will probably be inclined to look past the supply-side-driven uptick.”

-- Justin Jimenez, Asia Economist

Read full research here.

Compared with the previous month, South Korea’s consumer prices rose 0.2% in April. Core inflation came in at 1.4%, versus the prior year.

Vice Finance Minister Lee Eog-won agreed Tuesday that the chance of entrenched 2% inflation is “limited.” Meanwhile, he pledged the government will try to stabilize prices so second-quarter price gains won’t lead to excessive inflationary expectations.

Improving consumer confidence and economic forecasts hold up the inflation outlook. Korean consumers have remained optimistic for two months in a row and the country is seeing a string of outlook upgrades by analysts, with Goldman Sachs and JPMorgan both seeing more than 4% economic growth for 2021.

Prices for foods and non-alcoholic beverages saw the biggest year-on-year gain, rising 8.1% in April. Compared to a month earlier, they edged down 0.2%.

Costs of transportation increased 6.4% year on year in a sign of rising energy prices. The entertainment and leisure sector saw a price gain of 1.2% from a year earlier, while inflation for restaurants and hotels reached 1.8%.

©2021 Bloomberg L.P.

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