South Korea's inflation hits fastest pace since 1998 ahead of BOK decision

SOUTH KOREA'S inflation hit its fastest pace since late 1998 in June, outstripping forecasts again and keeping pressure on the Bank of Korea (BOK) to go ahead with an outsized interest-rate hike next week.

Consumer prices advanced 6 per cent from a year earlier, quickening from 5.4 per cent in May, the statistics office reported on Tuesday (Jul 5). That's the fastest clip since November 1998 when prices rose 6.8 per cent. Economists had expected the rate to climb 5.9 per cent.

Rapid price gains have been the biggest concern for global policymakers this year, including those at the BOK. The central bank is increasingly expected to carry out a half-percentage-point rate hike next week to tamp down inflationary pressure hurting the economic outlook.

Price growth that pushes up wages to create a feedback cycle of rising costs is a key risk being monitored by the BOK. Korea decided last week to raise its minimum wage next year by 5 per cent and Hyundai Motor workers last week voted to go on a strike to demand higher wages.

The Federal Reserve's accelerating policy tightening is another factor making it difficult to rein in Korea's consumer prices as it puts the won under pressure and makes imports more expensive. The Fed is considering whether to go for another 75 basis point rate hike later this month to curb inflation that's already at a 40-year-high.

How the won performs ahead of the rate decision next week will be a key consideration for the BOK, said Jeong Wonil, an economist at Yuanta Securities.  The won lost 4.7 per cent against the dollar in June, falling 6.7 per cent in the second quarter to become the worst performing currency in Asia after the yen.

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"A 50 basis point hike can't be ruled out, but there's also possibility that the BOK will continue to move gradually, given concerns that too fast a pace may fuel a recession," Jeong said. He expects inflation to peak out during the June-September period.

The BOK has raised rates 5 times since August, each by 25 basis points, as it made an early start to the global exit from record stimulus that is among the factors that initially fuelled prices.

Challenging the push toward higher rates are Russia's ongoing war in Ukraine and Covid lockdowns in China. Korean consumers turned pessimistic for the first time in more than a year last month.

Korea's low unemployment remains a bright spot for the economy. Exports are also continuing to grow despite looming fears of a potential global economic recession.

Today's inflation report also showed:

• Compared with the previous month, consumer prices advanced 0.6 per cent
• Core inflation accelerated to 4.4 per cent from a year earlier, the fastest pace since March 2009
• Transportation costs led the gains, jumping 16.8 per cent from a year earlier
• Utility costs rose 5.1 per cent. Food and beverage prices increased 6.5 per cent. The price of household goods and services climbed 5.5 per cent.
• Prices at hotels and restaurants jumped 7.9 per cent as consumers increase travel. BLOOMBERG