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South Korea May inflation at 4-month low as oil prices take toll

Wednesday, June 1, 2016 - 08:05
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South Korea's annual inflation in May cooled more than expected to a four-month low, as lower energy costs pulled prices further away from the central bank's target.

[SEOUL] South Korea's annual inflation in May cooled more than expected to a four-month low, as lower energy costs pulled prices further away from the central bank's target.

The consumer price index rose 0.8 per cent in May from a year earlier, Statistics Korea data showed, down from a one per cent increase in April and the lowest since a similar reading in January.

Economists polled by Reuters had expected a median 0.9 per cent rise.

"This weakness doesn't look to be temporary as I thought it would be over 1 per cent. At this rate it will be difficult to meet the central bank's 2 per cent inflation target or the 1.3 per cent inflation we saw last year," said Kim Doo Un, an economist at Hana Financial Investment.

"The Bank of Korea will likely hold interest rates in June but they might cut them in July considering recent data." Mr Kim added there is an upside risk from rising global oil prices and from increasing import prices should the won steadily weaken against the US dollar.

Industrial goods inflation mainly contributed to the headline inflation rate, down 0.9 per cent on-year and easing for a fifth straight month.

Within industrial goods, inflation for mostly oil-related products saw declines, including gasoline, diesel and liquefied petroleum gas (LPG).

Services inflation was 2.2 per cent on-year in May, steady from April and bolstering views consumption is steadily on the mend.

Annual inflation has remained well below the central bank's target of 2 per cent so far this year, reflecting both lower energy prices but also sluggish domestic demand.

The Bank of Korea has made it a requirement for the central bank governor to give a separate explanation regarding inflation should it miss the target for six months straight.

Although most analysts see the Bank of Korea cutting rates from the current 1.50 per cent in either June or July, the central bank may not want to move if the US Federal Reserve raises interest rates this summer, which could spur capital outflows from emerging markets.

Over the previous month, the consumer price index showed no change, weaker than the median forecast for a 0.2 per cent rise.

Annual core inflation, which strips out volatile food and fuel prices, was up 1.6 per cent last month versus a 1.8 per cent gain in April.

The central bank and the government expect inflation to start gradually picking up from the second half of this year.

REUTERS