South Korean inflation picks up as political fallout spreads

SOUTH Korea’s consumer inflation gained pace as political turmoil weighs on the local currency, threatening price stability in a country heavily reliant on imports for food and energy.

Consumer prices advanced 1.9 per cent in December from a year earlier, faster than the 1.5 per cent rise in November, the statistics office reported on Tuesday (Dec 31). Economists surveyed by Bloomberg had forecast the pace of price growth would be 1.7 per cent.

The latest data complicates the policy equation for the Bank of Korea (BOK), possibly limiting its room for reducing its benchmark interest rate next year following back-to-back cuts in October and November. Policymakers are also concerned that economic growth may weaken further due to the political turmoil sparked by President Yoon Suk-yeol’s brief imposition of martial law, which ultimately led to his impeachment.

“The impact on inflation from a weaker currency may grow in coming months, but the biggest worry at the moment is withering consumer sentiment,” said Ahn Jae-kyun, an analyst at Shinhan Investment. “January is likely the right timing for a rate cut given both production and consumption are languishing.”

The nation’s challenges were further compounded by a deadly plane crash on Sunday, which killed all but two of the 181 people onboard. Acting President Choi Sang-mok has declared a week-long mourning period till Jan 4, which may weigh on consumer sentiment.

BOK governor Rhee Chang-yong said even before the disaster that the economy next year may be unable to grow 1.9 per cent as forecast previously.

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Economists see weak private spending, a cooling export rally and deteriorating consumer confidence as factors driving the BOK to accelerate its easing next year. The actions of global central banks, including the US Federal Reserve, in the coming months will also play a role in shaping the BOK’s decisions.

Consumer prices rose sharply after the South Korean government implemented stimulus to shore up growth during the coronavirus pandemic. Now, many central banks feel confident enough to loosen their restrictive policies, as their rate hikes have helped reduce inflationary pressures.

Prices of alcoholic beverages and tobacco fell 0.4 per cent from a year earlier in December while those of food and non-alcoholic beverages increased by 2.5 per cent. Costs of entertainment rose 1.2 per cent while utility prices increased 1.7 per cent, the statistics agency data showed. BLOOMBERG