The Bank of Korea: "Core inflation and economic recovery will gradually increase"

Bank of Korea 'BOK Issue Note - Review of Core Inflation Indicators'

[Asia Economy Reporter Eunbyeol Kim] Amid ongoing debates over whether the recent inflation surge is temporary, the Bank of Korea (BOK) announced on the 30th that the underlying inflation trend is expected to gradually rise as the economic recovery continues.

In the 'BOK Issue Note - Review of Underlying Inflation Indicators' released that day, the BOK stated, "While the consumer price inflation is expected to gradually slow down as the impact of supply-side factors diminishes, the underlying inflation trend is anticipated to rise gradually as the economic recovery continues."

After examining six 'underlying inflation indicators' excluding highly volatile inflation disturbances, the BOK found that on average, the underlying inflation indicators sharply slowed down in spring last year due to the impact of COVID-19 but have rapidly expanded since March this year.

The growth rate of the underlying inflation indicators plunged from 1.4% in January last year to 0.6% in April last year, but recorded 1.2% in March this year and reached 1.9% in July. Since the beginning of this year, the underlying inflation indicators have surpassed pre-COVID-19 levels and maintained a high level. Currently, the underlying inflation indicators are at their highest level since 2018.

Underlying inflation indicators tend to have lower volatility and higher persistence compared to consumer prices because the effects of disturbance factors are removed. Last year, the growth rate of underlying inflation indicators was on average 0.4 percentage points higher than the consumer price inflation rate, whereas from January to July this year, it was 0.5 percentage points lower. Comparing last year and this year’s inflation indicators, the volatility of consumer prices was more than twice as large as that of underlying inflation.

Dongwon Lee, Deputy Head of the Price Trends Team at the BOK’s Research Department, said, "Considering the recent underlying inflation trend, inflationary pressures are assessed to be expanding broadly rather than being limited to certain items," adding, "This expansion of the underlying inflation trend reflects the recent economic recovery and is believed to be influencing the rise in inflation expectations."

He continued, "Taking these points into account, while the rise in consumer prices is expected to gradually slow down as the impact of supply-side factors diminishes, the underlying inflation trend is expected to gradually increase as the economic recovery continues."

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