(Aug 4): South Korea’s consumer inflation slowed more than expected, falling back below 3% and after accelerating to its fastest pace since late 2023 a month earlier, easing pressure on policymakers to tighten policy.

Consumer prices rose 2.8% from a year earlier in July, the slowest pace since April, after the 3.2% pace in June, data from the Ministry of Data and Statistics showed Tuesday. The reading compared with the median estimate of 3% in a Bloomberg survey of economists.

Core inflation, which strips out volatile food and energy prices, picked up a tad to 2.6%, suggesting underlying price pressures remained firm despite the moderation in headline inflation.

While the slowdown may ease concerns that inflation is accelerating again, the reading is still well above the Bank of Korea’s target rate, and is therefore unlikely to alter its policy outlook. Officials have continued to argue that resilient consumer prices, growth and elevated housing prices warrant maintaining a tightening bias.

“While markets would welcome softer core inflation, that’s not yet happening,” Jemin Choi, an economist at Hyundai Motor Securities Co., said by phone. “With geopolitical uncertainty lingering, the BOK’s policy stance is unlikely to shift materially,” Choi said, adding that inflation is likely to remain a concern for now as demand-driven price pressures have been gradually building since around May. 

While the government’s price-stabilisation measures are expected to exert downward pressure, core inflation is likely to remain elevated as cost shocks continue to feed through and demand-side pressures strengthen, the BOK said in statement after the data release.

The CPI report comes after the central bank raised its benchmark interest rate by 25 basis points to 2.75% last month, its first increase since January 2023. Governor Shin Hyun Song warned that inflation is expected to stay above the bank’s 2% target for quite some time as conflicts in the Middle East continue, and any further rate hikes will depend on price pressures, growth and financial market stability.

Whether the BOK hikes rates in August looks more like a matter of choice than a necessity, Choi said. A back-to-back hike could lead markets to price in a higher terminal rate and trigger a stronger market reaction, although much will depend on its communication, particularly with the updated dot plot due in August, leaving policymakers with flexibility for now, he added. 

The latest data also follow another month of robust export growth, with semiconductor shipments continuing to underpin South Korea’s artificial intelligence-driven expansion. Strong investment and exports have helped offset weakness in pockets of the domestic economy, while supporting expectations that price pressures could remain persistent.

South Korea’s economy expanded 0.6% in the second quarter from the previous three months, beating economists’ expectations. The government expects growth to reach 3% this year, a projection that’s more optimistic than forecasts by the BOK and the International Monetary Fund, as AI-related investments continue to boost exports and domestic demand.

The advance in the CPI was led by transportation costs, which rose 7.7% in July from a year earlier, while recreation and culture gained 5.5%. Food and lodging increased 2.8% and household goods and services climbed 3%.

Broader consumer-price increases remained modest, with communication costs gaining 0.7% and food and non-alcoholic beverage prices rising 0.9%.

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