South Korea’s inflation edges down as rate hikes cool demand

SOUTH Korean inflation edged down in September in a sign that policy tightening is beginning to weigh on demand, a result that’s likely to intensify debate over whether to deliver an outsized interest-rate increase next week.

Consumer prices advanced 5.6 per cent from a year earlier, easing from August’s 5.7 per cent that was also economists’ median estimate, statistics office data showed on Wednesday (Oct 5). The Bank of Korea (BOK) is under pressure to raise rates by a half percentage point to try to bridge a gap that’s opened up with the Federal Reserve.

The BOK, which began its tightening cycle in August last year, has fallen behind the Fed as the US hikes aggressively to rein in spiralling inflation. The rate gap has sent the won tumbling to a 13-year low, boosting import costs and threatening to amplify inflation pressures.

The BOK sees consumer-price growth holding in a 5-6 per cent range for some time. Policymakers meet on Oct 12 and convene again in November before the end of the year. The key rate currently stands at 2.5 per cent.

Inflation has been fuelled this year by a jump in consumer demand for dining and travel as the grip of the pandemic eased on the economy. Unemployment also remains low as consumption drives service sectors, the biggest generator of jobs in the country.

Rising consumer prices encourage workers to demand higher pay, feeding a wage-price spiral. Korea is already set to increase its minimum wage by 5 per cent next year.

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Slowing exports and high household debt remain risks as the BOK considers picking up the pace of tightening. Business confidence among manufacturers is deteriorating while the consumer outlook remains under threat from higher rates.