Possibility of 2% Consumer Price Increase in June... Core Inflation Remains a Variable (Comprehensive)

May Inflation Rate Hits 19-Month Low
Clear Signs of Inflation Deceleration
Base Effects on Petroleum and Livestock Prices

The consumer price inflation rate in May recorded its lowest level in 19 months at 3.3%, showing a clear slowdown in inflation. This is due to the recent continued decline in petroleum prices, which were the main cause of last year's price surge, and the core inflation, which had remained stagnant, also turning downward. As a result, it is expected that the consumer price inflation rate in June could fall into the 2% range, which is the inflation target.

On the morning of the 2nd, the Bank of Korea held a 'Price Situation Review Meeting' chaired by Deputy Governor Kim Woong and stated, "The consumer price inflation rate in May continued a clear slowdown trend as expected due to the base effect." Deputy Governor Kim said, "The consumer price inflation rate is likely to continue a clear slowdown trend until mid-year, falling to the 2% range, but then it will rise again, fluctuate, and by the end of the year, it is expected to be around 3%."

The slowdown in inflation is because petroleum and livestock product prices fell sharply compared to the same month last year due to the base effect. Petroleum prices dropped 18.0% compared to a year ago, marking the largest decline in three years since May 2020 (-18.7%). The contribution of petroleum prices to the overall inflation rate also expanded its negative margin to -0.99 percentage points from the previous month, becoming the main driver of the easing inflation trend. Last month, the livestock product price increase rate (month-on-month) was 3.5%, significantly down from 8.6% recorded a year ago.

In particular, the core inflation, which had recently shown a rigid trend, has turned slightly downward, raising expectations that the easing of inflation will accelerate in the future. The rise rate of the core inflation index excluding food and energy, a key indicator monitored by the Bank of Korea, fell by 0.1 percentage points from 4.0% in April to 3.9% in May. Amid this year's slowdown in inflation, the food and energy excluded index had remained steady at 4.0% from February to April, but it has now dropped to the 3% range for the first time in 10 months, showing a downward trend.

Choi Chang-ho, head of the Bank of Korea's Research Department, explained, "The core inflation rate (excluding food and energy), which shows the underlying trend of prices, slightly slowed down as the price increase of goods centered on textiles expanded, but the rent slowdown trend continued and the rise in personal service prices narrowed." However, the core inflation rate is expected to continue a slower slowdown trend compared to consumer prices until around mid-year. The expected inflation rate, which reflects consumers' inflation expectations, also fell for three consecutive months, recording 3.9% in March, 3.7% in April, and 3.5% in May, dropping to the mid-3% range, reflecting growing expectations for future price stabilization.

Core Inflation Decline Signals 'Green Light' for Prices... Uncertainties Remain

Experts evaluated that the slight downward shift in core inflation could be a positive signal for future inflation easing, but uncertainties remain. On the 25th of last month, the Bank of Korea maintained its annual inflation forecast at 3.5% in its revised economic outlook but raised the core inflation forecast from 3.0% to 3.3%, an increase of 0.3 percentage points. Bank of Korea Governor Lee Chang-yong said, "I have become confident that inflation will converge around 3% by the end of the year, but I am less confident about whether it will fall from 3% to 2%. Core inflation carries risks such as cost pass-through due to improvements in the service sector."

Hong Kyung-sik, director of the Bank of Korea's Monetary Policy Department, also pointed out on the Bank of Korea blog on the 30th of last month, "Core inflation does not show a clear slowdown trend, and especially the price rise in services with high persistence such as dining out and other personal services has recently expanded." The average rise rate of fundamental price indicators such as non-administered core inflation, adjusted average inflation, weighted median inflation, and non-administered sticky inflation has shown a gradual slowdown since October last year, but the large discrepancies among indicators make it difficult to be certain about a trend slowdown. The increased persistence and magnitude of the core inflation impact from supply shocks such as oil prices is also a factor slowing the core inflation slowdown trend.

Kim Jung-sik, emeritus professor of economics at Yonsei University, said, "Although the consumer price inflation rate shows a clear downward stabilization trend, the slow pace of core inflation decline could be a major variable for future monetary policy," adding, "The Bank of Korea's upward revision of the core inflation forecast in last month's Monetary Policy Committee's revised economic outlook is a factor that lowers market expectations for interest rate cuts." An Ye-ha, a researcher at Kiwoom Securities, said, "Although consumer prices are slowing down, there are risk factors due to public utility fee increases," adding, "The increase in public utility fees such as electricity and gas could increase pressure on service price rises, potentially reigniting inflation that had been calming down."

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