Consumer price inflation in South Korea fell short of expectations in July as lower fuel and agricultural prices dampened the overall inflation rate, but underlying inflationary pressures increased.
The country’s consumer price index (CPI) rose 2.8% from a year earlier, easing from 3.2% in June and coming in below economists’ median forecast of 3.0%.
The CPI dropped 0.2% every month to register its first monthly decrease in the past eight months, according to data released Tuesday by Statistics Korea. Lower petroleum product prices helped keep the soft side reading primarily the main reason for the softer result, which provided a brief respite from months of elevated prices associated with higher global energy costs.
However, the moderation in headline inflation masks continued pressure on household spending. Core CPI, which excludes volatile food and energy prices, increased 2.6% from a year earlier in July, up from 2.5% in June and the highest reading since December 2023.
The increase suggests inflation has broadened beyond energy costs into goods and services that consumers purchase regularly.
Fuel, Agricultural Prices Drive Headline Inflation Lower
The price of petroleum products increased by 15.5% in July compared with the same month a year ago, but at a much smaller pace than the 24.7% increase in June.
The Middle East temporary ceasefire helped to bring back stability in oil prices, while fuel price caps imposed by the government helped to keep prices down across the country.
The fuel price caps saved inflation from hitting another record high in July by 0.3 percentage points, according to the finance ministry.
The Bank of Korea (BOK) also cited agricultural product prices as taking a hit, leading to a drop of 2.2% from a year ago, which helped keep the headline inflation rate from rising. The monthly fall in CPI was due to a 5.5 per cent decline in petroleum product prices from June, which was shorter than economists’ forecast of a monthly increase of 0.1 per cent.
Core Inflation Remains Elevated
Despite the softer headline reading, policymakers signaled that underlying inflation remains a concern.
“Consumer prices in July slowed as prices of petroleum and agricultural products fell. However, core inflation rose slightly due to higher prices of durable goods amid cost-push inflation,” Bank of Korea Deputy Governor Lee Ji-ho said during a meeting reviewing inflation trends.
The central bank’s attention is drawn to the increase in core inflation as being indicative of greater price pressures that are more likely to persist than the changes in energy and food prices.
Policymakers Warn Inflation Risks Persist
South Korea continues to be very vulnerable to fluctuations in global energy prices due to its dependence on imports of crude oil and natural gas, the majority of which originates in the Middle East. Year-on-year inflation was up to 3.2% in June, from 2% in February, as earlier disturbances related to the Iran conflict accelerated the inflation rate.
Vice Finance Minister Lee Hyoung-il said upward price pressures remain despite July’s moderation.
“Upward price pressures, including uncertainty over the Middle East war, persist,” Lee said.
The Bank of Korea resumed raising interest rates last month for the first time in three and a half years, citing persistent inflation risks alongside solid economic growth. Policymakers have indicated additional rate increases remain possible if underlying inflation continues to strengthen.
August Inflation Expected to Rise Again
The Bank of Korea expects July’s easing to prove temporary.
Lee Ji-ho said inflation is likely to accelerate in August because of base effects stemming from large-scale mobile carrier discount programs introduced a year earlier.
“In August, inflation is projected to accelerate, driven by the base effect of large-scale discount programs offered by some mobile carriers last year,” Lee said.
The finance ministry separately has concluded those base effects contributed an additional 0.8 percentage points to inflation in August.
Headline inflation growth was held back by lower fuel prices over July, but core inflation rose, and the South Korean household likely anticipates further increases next month, suggesting that cost-of-living pressures are continuing to be strong for South Korean households.
