S.Korea inflation at 9-year peak fuels rate hike expectations

FILE PHOTO: People wearing masks walk at Myeongdong shopping district amid social distancing measures to avoid the spread of the coronavirus disease (COVID-19), in Seoul
FILE PHOTO: People wearing masks walk at Myeongdong shopping district amid social distancing measures to avoid the spread of the coronavirus disease (COVID-19), in Seoul, South Korea, May 28, 2020. REUTERS/Kim Hong-Ji/File Photo

September 2, 2021

By Joori Roh

SEOUL (Reuters) -South Korea’s August consumer inflation stayed at a nine-year peak, raising the chances the central bank will hike rates again this year as strong demand adds to price pressures.

Consumer prices in August rose 2.6% from a year earlier, Statistics Korea said on Thursday, matching the rate in July, driven by a spike in fresh food prices due to a heat wave and high cost of oil products, housing rental and other services.

The inflation rate beat the 2.3% increase forecast by economists in a Reuters poll.

The 2.6% rise was first seen in May, when inflation marked the fastest pace since April 2012, and continued to stay above the central bank’s 2% target for a fifth straight month.

Thursday’s data comes a week after the Bank of Korea raised its policy rate for the first time in almost three years, becoming the first major Asian central bank to shift away from pandemic-era monetary settings as ballooning consumer debt created new threats for the economy.

“Our base case is for the next hike to materialise in early 2022, but we acknowledge that increasing demand-side price pressures and rising inflation expectations could trigger an earlier move in November this year, if growth uncertainties ease by then,” ANZ Economist Krystal Tan said in a note.

The breakdown of data showed the continued price surge for agricultural and oil products fuelled inflation.

The cost of agricultural, livestock and fisheries and petroleum products jumped 7.8% and 21.6%, respectively, while that of housing rentals and dining rose 1.6% and 2.8% each.

CPI rose 0.6% month on month, the best reading since January and accelerating from 0.2% in July. Economists had forecast a 0.3% increase.

Meanwhile, core CPI rose 1.3% from a year earlier, marking the fastest pace since June 2018 and up from a 1.2% rise in July.

The BOK pushed up its inflation projection for 2021 to 2.1% from 1.8% previously, and sees it standing at 1.5% for the whole of 2022.

In the Reuters poll published last week, all 18 analysts who gave end-2022 forecasts saw further rate increases next year, after the BOK raised its policy rate from record lows to 0.75%.

A slim majority of 10 analysts predicted the base rate would stand at 1.25% by the end of next year.

(Editing by Michael Perry and Jacqueline Wong)