[BOJ Price Check] BOJ "Core Inflation to Continue Rising Next Year"

Publication of 'Recent Core Inflation Trend Assessment Report' on the 24th
Core inflation in May recorded at 1.2%, Excluded Core Inflation at 1.7%

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] An analysis has emerged that the core inflation rate excluding administered prices is expected to rise from the mid-1% range this year to the high-1% range next year. Administered prices exclude supply-side factors and government policy influences.

Lee Dongwon, Deputy Director of the Price Trends Team at the Bank of Korea’s Research Department, along with researchers Kim Yunkyung and Kang Dalhyun, stated in the "Recent Core Inflation Trends Evaluation Report" (BOK Issue Note) on the 24th that while the consumer price increase is expected to significantly expand this year and then ease next year, core inflation is likely to continue its upward trend next year.

The core inflation rate (excluding agricultural products and petroleum products), which shows the underlying trend of prices, dropped close to 0% around April last year due to weakening demand-side price pressures but has gradually increased since then, exceeding 1% in the second quarter of this year. Core inflation excludes prices of agricultural products and petroleum products, which are highly affected by seasonal factors or temporary shocks, and is calculated based on 407 items out of a total of 460 items, excluding those related to agricultural and petroleum products.

The research team analyzed that the price increase of personal services has gradually risen since the second half of last year, and the rise in rent has also been gradually expanding since the second quarter of last year.

On the other hand, public service prices (18.0%) have continued to decline since 2019 due to expanded free high school education, strengthened health insurance coverage, and support for communication costs, and industrial product prices (29.1%) have maintained a relatively low rate of increase, the team evaluated.

The researchers analyzed that the core inflation rate excluding administered prices shows a higher rate of increase compared to core inflation. As of May 2021, core inflation was recorded at 1.2%, while core inflation excluding administered prices was 1.7%.

Personal service prices lead core inflation rise... Rent and industrial product prices exert upward pressure

The research team predicted that personal service prices are leading the core inflation rise by recovering to the usual level of increase. In fact, personal service prices rose 1.8% as of May this year compared to the end of last year, surpassing last year’s annual increase of 1.3%.

They also analyzed that dining-out prices rose 1.7% as of May compared to the end of last year, exceeding the usual level of increase due to rising raw material costs caused by sharp increases in agricultural and livestock product prices. Additionally, rent and industrial product prices are seen as potential upward pressure factors.

Core inflation recently turned upward earlier than in past crises due to the rapid economic recovery. In fact, during the global financial crisis and the European debt crisis, it took 14 months and 12 months respectively for core inflation to rise again after entering a contraction phase, whereas during the COVID-19 crisis, it turned upward in just 4 months.

The research team expects that upward pressure on core inflation will gradually increase with a time lag as slack indicators have been shrinking relatively quickly thanks to the rapid economic recovery. They analyzed that the negative gap rate of gross domestic product (GDP) is rapidly narrowing, and in the labor market, the number of employed persons and employment rate are closing the gap with pre-COVID-19 levels.

The researchers stated, "With general inflation expectations rising recently and inflationary pressures from both demand and supply sides during the normalization of economic activities potentially greater than expected, it is necessary to closely monitor inflation trends and changes in economic agents’ inflation expectations."