[BOJ Price Check] "Second Half Inflation Fluctuates Around 2%... Core Inflation Recovers Faster Than Before"

Bank of Korea 'Review of Inflation Target Operation Status'

[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea has projected that the consumer price inflation rate will fluctuate around 2% in the second half of the year, supported by a rapid economic recovery and expanding demand-side inflationary pressures. The core inflation rate, which had remained in the 0% range for the past two years, is expected to continue rising above 1%, with the speed of core inflation recovery being faster compared to previous crises.

As the recovery of the Korean economy becomes more evident, demand-side inflationary pressures are expected to gradually increase. In last month's economic outlook, the Bank of Korea forecasted an annual consumer price inflation rate of 1.8% for this year, with core inflation excluding food and energy at 1.2%. Recently, the rise in personal service prices, such as dining out, has also accelerated, suggesting that the annual consumer price inflation rate could approach the inflation target of 2%.

According to the "Price Stability Target Operation Status Review" released by the Bank of Korea on the 24th, the recent expansion in consumer price increases was significantly contributed not only by supply factors such as agricultural and livestock products and oil prices but also by personal service prices. This indicates that the price rise was not only due to supply shortages but also reflected a substantial underlying inflation trend. Breaking down the contribution of each item to the year-on-year consumer price inflation rate in April-May, agricultural and marine products contributed +1.0 percentage points, services +0.8 percentage points, and petroleum products +0.7 percentage points, in that order.

Regarding service prices, the upward trend in rent continued, while the rise in personal service prices returned to normal levels, and the decline in public service prices narrowed, leading to a gradual expansion in the overall increase. In particular, dining out prices (excluding school meal costs) rose by 1.7% as of May compared to the end of the previous year, significantly exceeding the usual increase of 1.4%.

As the rise in personal service prices intensifies, the inflation rate of COVID-19 demand-sensitive prices has also expanded significantly. According to the BOK Issue Note released by the Bank of Korea on the same day, the inflation rate of COVID-19 demand-sensitive prices fell to -0.1% year-on-year in April last year but has sharply increased to nearly 2% (1.9%) since April this year.

The core inflation rate, which better reflects the underlying inflation trend by excluding food and energy prices, recorded 1.2% last month. Due to the impact of COVID-19, it had dropped to nearly 0% in April last year but has exceeded 1% since April this year.

Excluding administered prices, the core inflation rate's increase is even more pronounced. The core inflation rate excluding administered prices rose to 1.7% in May, reaching the mid-to-high 1% range. The Bank of Korea explained, "The recent expansion of the underlying inflation trend is due to the recovery of personal service price increases to normal levels this year, centered on dining out prices."

Inflationary pressures on other core items such as public service prices, rent, and industrial product prices are also expected to gradually increase. The Bank of Korea stated, "Public service prices are expected to rise as downward pressure from government policies, such as free high school education, gradually disappears," and "Rent is expected to continue its gradual upward trend seen since the second quarter of last year due to ongoing increases in jeonse and monthly rents." Regarding industrial product prices within core inflation, the Bank of Korea noted that the ongoing rise in raw material prices since the second half of last year may increasingly act as upward pressure.

Meanwhile, the Bank of Korea assessed that core inflation is recovering faster compared to past crises. During the global financial crisis and the European sovereign debt crisis, it took 14 months and 12 months, respectively, for core inflation to rise again after entering a contraction phase, but during the COVID-19 crisis, it took only 4 months.

Furthermore, the Bank of Korea stated, "Supported by the rapid economic recovery, slack indicators have been shrinking relatively quickly since the second half of last year, and demand-side inflationary pressures are expected to gradually increase." Slack indicators refer to the extent to which key production factors such as labor and capital (factories, equipment, etc.) remain idle due to insufficient demand. As the economy recovers, manufacturing operating rates rise, and employment numbers recover, there are many factors that could push prices higher.

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