[Bank of Korea Communication Report] "Inflation to Fluctuate Around 2% in the Second Half... Possibility of Pent-Up Consumption Surge"

Bank of Korea 'Monetary and Credit Policy Report (June 2021)'

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea forecasted that the consumer price inflation rate will exceed 2% in the second quarter of this year and fluctuate around 2% in the second half of the year. As the economic recovery accelerates, demand-side inflationary pressures are also increasing, and pent-up consumption is rising, which could further intensify inflationary pressures.

In the 'Monetary and Credit Policy Report (June 2021)' released on the 10th, the Bank of Korea stated, "Considering recent price trends and major conditions, the rise in agricultural and livestock product prices is expected to slow down, but international oil prices are significantly higher than last year’s level, and demand-side inflationary pressures are expected to gradually increase."

The Bank of Korea expects inflation to fluctuate around 2% in the second half of the year, with a considerable increase compared to last year. It added, "Core inflation (excluding food and energy), which remained in the 0% range for the past two years, is expected to exceed 1% this year as the economy gradually improves. Excluding administered prices, the rate of increase is expected to be even greater."

It also added, "Next year, the impact of supply-side factors such as oil prices and agricultural and livestock product prices is expected to diminish, leading to a slowdown in consumer price inflation compared to this year. However, core inflation is expected to continue rising as the economic improvement trend persists."

Breaking down the inflation factors, major institutions such as the International Monetary Fund (IMF) and the World Bank (WB) expect raw material prices to remain high for the time being due to supply-demand imbalances, but anticipate that supply will increase around next year, gradually stabilizing prices. Agricultural and livestock product prices, which rose sharply due to last summer’s heavy rains and the cold wave earlier this year, are expected to return to normal levels with improved supply conditions unless further shocks occur.

However, pent-up consumption and rising inflation expectations were identified as future inflationary pressure factors.

The Bank of Korea stated in the report, "Especially after the spread of COVID-19, fiscal spending has significantly increased to support households. With increased household savings and accumulated purchasing power, if economic activity restrictions ease due to accelerated vaccination, pent-up consumption may be unleashed. In this case, demand-side inflationary pressures could expand faster than expected."

It continued, "Reflecting the recent rise in prices, inflation expectation indicators based on financial markets, such as the Break-Even Inflation (BEI), and general public inflation expectations (for the next year) are also on an upward trend. There is concern that the widening price increases of items with high purchase frequency and expenditure shares, such as petroleum products, could stimulate inflation expectations."

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