Rising consumption: A file picture of customers at a cafe at the Gangnam district of Seoul. Vegetable prices in South Korea jumped 4.4% in January, while costs associated with electricity, gas and water increased 3.1%. — Bloomberg
SEOUL: The Bank of Korea (BoK) has predicted inflationary pressure will soon cool after price growth topped consensus in the latest reading, as authorities balance support for an economy threatened by Donald Trump’s tariffs against the risk that policy easing could further hit a local currency already battered by political turmoil.
Consumer prices advanced 2.2% in January from a year earlier, faster than the 1.9% rise in December, the statistics office reported.
Economists surveyed by Bloomberg had forecast the pace of price growth would quicken to 2.1%.
The data may have been exaggerated by the calendar, as the lunar new year holiday fell in January this year rather than in February.
That contributed to a pick-up in inflation as consumers increased purchases of products needed to host family gatherings or travelled out of town. Inflation excluding energy and food edged up to 1.9%.
The BoK attributed the advance to a rise in oil prices and said the recent weakening of the won added about 10 basis points to the latest inflation figure.
Price growth is expected to stabilise around the central bank target of 2% as inflation in oil and agricultural products slows and demand slackens, the BoK said in a statement.
“The BoK is more concerned about private spending than inflation,” said KB Securities economist Gweon Heejin. As gasoline prices weaken in coming months, inflationary pressure is likely to ease, she said, expecting the BoK to go ahead with its third rate cut since October.
The BoK fought a long battle to curb inflation in the wake of the pandemic before it pivoted on policy in October, easing its settings amid signs of economic cooling.
The central bank is widely expected to conduct a rate cut when it next sets policy on Feb 25. In January, authorities stood pat as they continued to assess the impact of back-to-back cuts in late 2024.
Policymakers are concerned economic growth may weaken further due to the political turmoil sparked by president Yoon Suk Yeol’s brief imposition of martial law, which ultimately led to his impeachment.
A tariff campaign undertaken by Trump’s White House also threatens to batter global trade. With many of its companies contributing to global supply chains, South Korea relies heavily on international commerce to drive its economic growth.
South Korea’s consumption remains another concern for policymakers.
The nation’s retail sales fell the most in 21 years last year, according to data released earlier this week. A deadly plane crash in December that killed all but two of the 181 people on board further weighed on consumer sentiment.
Acting president Choi Sang-mok designated a one-off holiday late last month to boost spending. His decision came after South Korea’s consumer confidence dropped in December by the most since the Covid-19 outbreak.
Economists view stagnant private spending, a sputtering export rally and political turbulence as factors that will prompt the BoK to accelerate its easing campaign this year.
The actions of global central banks including the Federal Reserve in the coming months will also play a role in shaping the BoK’s decisions.
The exchange rate has compounded the challenges for the BoK. After finishing 2024 as one of the world’s worst-performing currencies, the South Korean won has remained under pressure under the clouds of Trump’s tariff threats.
Currency weakness forces authorities to weigh the possibility that faster rate cuts might further undermine the won, fuelling inflationary pressure.
In minutes of the decision meeting last month, several board members expressed concerns that a third consecutive rate might further hurt the won. Even so, all six members excluding the governor said they were open to a rate cut in the next three months.
Agricultural products supported inflation gains as prices for the sector rose 1.9% from a year earlier in January. Vegetable prices in particular jumped 4.4%. Costs associated with electricity, gas and water increased 3.1%, according to data.
Transportation costs rose 3.3% from a year earlier and prices of entertainment increased 2.1%, the data showed.
Bloomberg economist Hyosung Kwon said: “This won’t deter the central bank from cutting rates this month.
“Domestic demand remains weak, and this helped counter upward pressures from an increase in gasoline prices – supporting our view that inflation remains under control.” — Bloomberg
