SEOUL: South Korea's consumer inflation quickened in May to a more than two-year high, exceeding market expectations on high oil prices triggered by the Middle East conflict, supporting the case for monetary tightening as early as next month.
The consumer price index (CPI) rose 3.1% from a year earlier, the biggest jump since March 2024, after climbing 2.6% in April, data from the Ministry of Data and Statistics showed on Tuesday. It was higher than the median 3.0% increase forecast in a Reuters poll.
Prices of petroleum products were 24.2% higher than a year earlier, while international airfare jumped 33.5%.
"It is expected that inflation will stay at the 3% level for the time being due to spillover effects of the oil price shock on other sectors," the Bank of Korea said after the data release, and pledged to closely monitor inflation conditions.
Last week, the BOK signalled an imminent turn toward a more restrictive policy stance to curb inflation and support a slumping won, as it raised its inflation forecast for this year to 2.7% from 2.2%. The central bank, which targets inflation at 2% in the medium term, next meets on July 16.
"After all, whether the peak will be in the second quarter or the third quarter will depend on the Iran war," said Park Sang-hyun, an economist at iM Securities, who expects inflation to rise to as high as the mid-3% range in a protracted war scenario.
"There will be a rate hike at the next meeting in July for sure. When it comes to how many hikes for this year, it will depend on the inflation trend so we have no choice but to watch how the Iran war develops," Park said.
Lebanon announced a partial ceasefire between Hezbollah and Israel on Monday in what would amount to a limited de-escalation of the U.S.-Israeli war with Iran that has killed thousands of people and broadened the conflict across the Middle East.
South Korea's policy-sensitive treasury bond yield rose 6 basis points to 3.847%, the highest since November 2023.
The finance ministry said inflation would have reached about 3.7% last month without the nationwide fuel price caps introduced in March for the first time in decades.
Annual core inflation, stripping out volatile food and energy prices, quickened to 2.5% in May, from 2.2% in April, marking the fastest pace since February 2024.
The CPI rose 0.5% over the month, the same pace as the previous month, but faster than the 0.3% rise expected by economists. - Reuters
