Bank of Korea signals upside risks to core inflation

SEOUL (Reuters) – South Korea’s central bank said on Monday that upside risks to core inflation were “a little high” amid strong consumer and employment trends, which raises the prospect of inflation rising for longer than expected.

“While there is great uncertainty regarding global energy prices, domestic and global economic growth, and public price increases on the future path of inflation, upside risks are assessed as somewhat elevated in regarding the outlook for core inflation,” the Bank of Korea said. (BOK) said in its semi-annual review of inflation conditions.

“If consumption and employment continue their robust trends, the ripple effects of cumulative rising cost pressures on core inflation could last longer than expected,” he added.

The BOK said in the report that core inflation, which has remained above headline inflation in recent months, was also declining at a much slower pace than in past comparable periods due to the stickiness of service prices.

Consumer price inflation in South Korea slowed to a 19-month low of 3.3% in May, but core inflation remained elevated at 3.9%, remaining above the headline figure for the second consecutive month.

Consumer inflation is expected to slow towards its medium-term target level of 2% by mid-2023, mainly due to high base effects, before rebounding to around 3% towards the end of the year , the BOK said in the report. The trend of a slower slowdown in core inflation is expected to continue through the middle of this year, he added.

Compared to Canada and Australia, whose central banks have recently resumed tightening interest rates after a few pauses, South Korea’s housing and labor markets have shown less upward pressure on price, also notes the BOK report.

The BOK expects core prices to rise 3.3% this year, it said last month, raising a February estimate of 3.0%. Overall consumer prices are expected to rise 3.5%.

The central bank held interest rates steady last month for a third straight meeting, but also signaled it may not be done tightening.

(Reporting by Jihoon Lee; Editing by Jamie Freed)

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