The Bank of Korea expects that the consumer price inflation rate, which is currently hovering around the high 1% range, will maintain a similar level in the second half of the year. This is due to low demand pressures and the recent weakening of the U.S. dollar, which has led to a decrease in the won-dollar exchange rate, increasing downward factors for prices. However, there is also upward pressure due to the recent escalation of geopolitical conflicts in the Middle East, which has caused oil prices to rise.
On the 18th, the Bank of Korea released a report titled 'Assessment of the implementation status of the price stability target.' Since 2019, the Bank of Korea has analyzed and issued reports on price conditions and future price trends once each in June and December.
◇ Consumer prices remain in the high 1% range... Slowdown in agricultural and petroleum prices
According to the Bank of Korea, prices have been stable recently. The consumer price inflation rate rose slightly from 1.8% in the second half of last year (compared to the same period last year) to 2.1% in the first half of this year (based on January to May), but on a monthly basis, it fell from 2.2% at the beginning of the year to 1.9% last month. This indicates that the increase is shrinking due to the drop in international oil prices and low demand pressures.
The core inflation rate, which shows the fundamental flow of prices (excluding food and energy), continues to remain stable. On a monthly basis, it fluctuated in the high 1% range from January to March this year, but with price increases in some service items, it rose slightly to 2.1% in April and 2.0% in May. However, it is still moving at the price stability target (2%) level.
The slowdown in prices of agricultural, livestock, fisheries, and industrial products as well as petroleum has led to a decrease in inflation rates. The inflation rate for agricultural and livestock products, which recorded 1.9% in January, fell to 0.1% last month due to an increase in agricultural product shipments and government price stabilization efforts. The price of petroleum turned downward with a decrease of 1.7% in April, and the decline expanded to 2.3% last month. The inflation rate for industrial products (excluding petroleum) also remained at 1.9% last month.
Although public utility and service prices have maintained somewhat high inflation rates, they have not reversed the trend of declining prices. Electricity, gas, and water fees have increased by 3.1% from January to last month due to the impact of the increase in city gas fees in August of last year. Service prices have shown a rise of around 2% as public service and personal service prices increased due to higher university tuition and dining costs.
Expectations for future inflation are showing a gradual downward trend. The short-term (next year) inflation expectations of the general public, which maintained a level in the high 2% range in the second half of last year, fell to 2.6% last month. Expert inflation expectations have been fluctuating around the target level (2.0%) since the fourth quarter of last year. The long-term expert inflation expectation is recorded at 1.8%, slightly below the price target.
◇ "U.S. tariffs will have a small inflationary impact if there is no active response"
The Bank of Korea also anticipated that the price stability trend would continue. While the upward factors increased due to price hikes in processed foods and some services during the first half of the year, it is likely that low demand pressures could offset this. The recent decline in the exchange rate to the mid-1,300 won range is also expected to limit the extent of price increases. The Bank of Korea predicts that both consumer and core inflation rates will remain in the high 1% range in the second half of this year.
However, it is expected that geopolitical tensions in the Middle East and public utility price increases will heighten uncertainty regarding prices. The Bank of Korea noted, "While the stability of agricultural prices is continuing, international oil prices have recently risen to the mid-$70 range due to escalating geopolitical tensions in the Middle East," adding that "a subway fare increase in the metropolitan area is scheduled for the end of June, and there are discussions about increases in other public utility prices."
The U.S. tariff policy could also act as an upward factor for prices. The Bank of Korea stated, "As the number of tariff-targeted items in the U.S. increases and tariff rates rise, both consumer goods and capital goods prices are likely to be affected," adding that "the rise in capital goods prices is evaluated as a factor that increases the persistence of inflation as it is passed on to consumer prices with a time lag through increased production costs."
However, the Bank of Korea believes that if there is no active response to the U.S. tariff policy, inflationary impacts may be smaller than expected. The Bank of Korea noted, "In countries that respond to U.S. tariffs with tariffs, the tariff policy is expected to directly lead to increases in import prices, acting as inflationary factors. However, in other trading countries that are cautious about responding to tariffs, the impact of U.S. tariffs is likely to act as a negative (-) demand shock, thereby lowering inflation."
The Bank of Korea said, "The uncertainty surrounding the U.S. tariff policy is very high," and noted that "based on future developments in tariff negotiations, the depreciation of the won or supply chain disruptions could also act as upward factors for prices, so it is important to pay attention to the interactions between various price drivers when assessing future price trends."