Inflation Rate Hits Highest in 9 Years... Bank of Korea Says "Expected Level, Base Effects Play Major Role"

Bank of Korea's "Assessment of May Consumer Price Inflation"
Inflation Trends Closely Monitored... Potential Increase in Price Pressures from Demand and Supply Sides

[Asia Economy Reporter Kim Eunbyeol] Last month, the consumer price inflation rate recorded 2.6%, reaching the highest level in over nine years. However, the Bank of Korea analyzed that this was an expected level and that the base effect from last year played a significant role.

On the 2nd, the Bank of Korea's Research Department released reference materials titled "Evaluation of the Consumer Price Inflation Rate in May 2021," stating, "The base effect caused by the sharp decline in petroleum prices in May last year played a major role, and this aligns with the level anticipated in the Bank of Korea's June forecast announced last week."

In May last year, the petroleum price inflation rate plunged by 18.7% year-on-year due to a sharp drop in demand caused by COVID-19. Because the decline was significant last year, the petroleum price inflation rate in May this year recorded 23.3%.

Bank of Korea Governor Lee Ju-yeol also predicted at a press conference regarding monetary policy direction, "The base effect from last year's sharp drop in oil prices has significantly influenced the consumer price inflation rate, which rose to 2.3% in April and is expected to be somewhat higher in May."

The Bank of Korea also stated that the continued strong rise in agricultural and livestock product prices contributed significantly to the consumer price inflation rate in May. The contribution of agricultural and livestock products was 0.95 percentage points, while petroleum contributed 0.83 percentage points.

Furthermore, the Bank of Korea said, "Going forward, the consumer price inflation rate is expected to moderate somewhat, fluctuating around 2% in the second half of the year and falling to the mid-1% range next year," adding, "This is because the influence of supply-side factors such as oil prices and agricultural and livestock products, which have recently driven the price increases, is expected to diminish."

On the other hand, the core inflation rate is expected to continue its upward trend next year as the economic recovery continues. Since the beginning of this year, personal service prices have risen by 1.8% compared to the end of last year as of May, recovering to the usual level (average from 2015 to 2019).

The Bank of Korea added that while it expects the consumer price inflation rate to decrease again, it is closely monitoring inflation trends. The Bank of Korea stated, "Short-term inflation expectations have recently been rising, and it is not possible to rule out the possibility that inflationary pressures from both demand and supply sides during the normalization of economic activities could be greater than expected," adding, "We will provide a detailed explanation of the recent price situation and future price trends again at the price briefing scheduled for late this month (June 24)."

This content was produced with the assistance of AI translation services.