South Korea's inflation quickens as central bank mulls rate hike

(Bloomberg) – South Korea’s inflation unexpectedly climbed in July as the central bank prepares to meet on rates amid the nation’s worst coronavirus outbreak yet.

Consumer prices rose 2.6 per cent from a year earlier, accelerating from a 2.4 per cent pace the prior month, the statistics office reported Tuesday. Economists had expected the rate to stay at June’s level.

The pickup in inflation comes as a recent surge in virus infections to over 1,000 new cases a day and tougher social distancing rules cloud the outlook. Bank of Korea Governor Lee Ju-yeol has signalled he’s preparing to raise rates to prevent asset bubbles from worsening, but he’s also said the timing depends on the virus situation. The BOK meets on Aug 26 for a rate decision.

Headline inflation has now exceeded the central bank’s mid-term goal of 2 per cent 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 (S$41 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 per cent of South Korean households and fuel consumer spending.

Compared with the previous month, consumer prices rose 0.2 per cent in July.

South Korea’s core inflation came in at 1.7 per cent, versus the prior year.

Transportation costs led the gains, jumping 7.6 per cent from a year earlier amid rising global energy prices. Costs of housing, water, electricity and fuel also increased 2.3 per cent.

Prices of food and non-alcoholic beverages increased 6.4 per cent.

Entertainment costs, which were heavily impacted at the height of the pandemic, increased 1.3 per cent in July. Education prices, however, fell 0.7 per cent. Communications costs dropped 2.2 per cent.

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