South Korea’s inflation cools further as policy stays tight

Consumer prices advance 2.7% in May from a year earlier, decelerating from a 2.9% clip in April

SOUTH Korea’s inflation eased more than expected, suggesting price pressure is cooling in line with the central bank’s expectations.

Consumer prices advanced 2.7 per cent in May from a year earlier, decelerating from a 2.9 per cent clip in April, the statistics office reported on Tuesday (Jun 4). Economists surveyed by Bloomberg had forecast the pace of price growth would moderate to 2.8 per cent.

The Bank of Korea (BOK) expects inflation to continue to slide towards its 2 per cent target by the end of this year even as economic growth picks up on the back of an export rally.

The central bank has said that it might consider easing policy should authorities gain confidence prices will cool as projected.

For now, continued growth in exports, led by semiconductors and automobiles, is giving the central bank confidence the economy can cope with its current restrictive policy settings, which are also credited with supporting the won against the US dollar.

South Korea relies heavily on imports of energy and food, so a weakening of the currency can spur cost-push inflation.

Meanwhile, weakening oil prices are offering some relief to policymakers still focused on reining in inflation. Sliding energy and agricultural prices probably eased inflationary pressure month on month even though private consumption may add to it, Standard Chartered said.

BOK governor Rhee Chang-yong kept alive speculation over a possible policy easing later this year after the bank’s board voted unanimously to hold the benchmark interest rate at 3.5 per cent last month.

The BOK maintained its inflation forecast for 2024 at 2.6 per cent while raising the economic growth forecast to 2.5 per cent from 2.1 per cent after the firstquarter gross domestic product expanded more than expected.

A strong economy in the US has been a boon for South Korean exporters at a time when China’s slump in consumption is damping demand for products from abroad. The Federal Reserve’s policy trajectory will be a key factor monitored by the BOK as South Korean officials remain wary of rate differentials between the two nations.

“The timing of the first US rate cut remains a key element of the BOK’S policy-making process,” Kelvin Lam, a Pantheon Economics economist, said. “The continued strength in Korea’s economic momentum, as exhibited by strong export performance, can withstand the current restrictive monetary stance.”

Elevated household debt is another factor keeping the BOK from rushing ahead with rate cuts. Rhee has pledged efforts to fight property-market bubbles as household debt is already starting to take a toll on consumer spending.

The inflation report on Tuesday showed prices of groceries and non-alcoholic beverages rose 5.1 per cent while those of clothes and shoes increased 2.5 per cent from a year earlier in May. Housing, water, electricity and fuel costs rose 1.4 per cent. Transportation costs increased by 3.8 per cent. Prices for food and lodging rose 2.9 per cent.

Among particular items, apples were among the leading gainers in fresh foods, with prices rising 80.4 per cent from a year earlier, while pear prices jumped 126.3 per cent. Among decliners, banana prices dropped 13.1 per cent while garlic prices fell 10.3 per cent.

Meat prices generally took a dip, with pork falling 5.2 per cent and poultry sliding 7.8 per cent. Metropolitan bus fares rose 11.7 per cent following a strike among drivers in late March in Seoul. Prices of imported cars rose 7.5 per cent, according to the report.