BOK: "Core Service Inflation Remains Unabated... Slowdown Pace Slower Than Before"

The Bank of Korea pointed out that the core service inflation, excluding rent, has not yet eased, and if the current favorable employment and consumption trends continue, the inflation rate exceeding the target level could persist for a considerable period.

In the 'Price Stability Target Operation Status Review' released on the 19th, the Bank of Korea stated, "Amid significant uncertainties regarding future inflation trends, consumer prices and core inflation exceeding the target level (2.0%) are expected to continue for a considerable period."

According to the Bank of Korea, the recent year-on-year core inflation in Korea has shown a rigid trend with a gradual decline in momentum since November last year. This is positive compared to the United States, where the core inflation momentum has not yet eased.

However, when breaking down the core inflation trend into goods, services, and rent, the situation remains unstable.

First, the momentum of goods price increases shrank earlier this year but expanded again in May. Until April, import prices fell due to stable raw material prices, but in May, textile product prices rose, causing renewed instability.

In particular, regarding the momentum of core service inflation, the United States has shown a easing trend since February this year, but Korea still shows rigidity. The Bank of Korea explained, "This is due to the favorable recovery in service consumption, labor market conditions, the pass-through of accumulated cost increases, and the high persistence of service prices."

However, rent has shown a clear deceleration trend due to the high interest rates since last year and has turned negative.

[Image source=Yonhap News]

The recent pace of core inflation slowdown is very slow compared to previous periods of inflation deceleration. According to the Bank of Korea, during past inflation slowdown periods, the core inflation rate decreased by more than 1 percentage point over six months after peaking, but recently it has only decreased by 0.4 percentage points over the same period.

The Bank of Korea analyzed that this very slow deceleration in core inflation is mainly due to the rigid trend in service prices. While the slowdown speed of core goods prices is not significantly different from that in 1998 or 2008, core service prices are slowing at a much slower pace compared to the past.

Bank of Korea's analysis showed that dining-out prices are leading the high persistence of service prices.

Dining-out accounts for a significant share (29.1%) within core services, and among detailed items in dining-out, those with high price persistence account for a very large proportion (89.6%). In particular, the recent rise in dining-out prices is at a higher level compared to the past.

The Bank of Korea pointed out that since service consumption has continued to increase favorably until recently, and the number of employed persons is also increasing, unlike during the inflation slowdown periods in 1998 or 2008, the upside risk to inflation is significant.

The Bank of Korea explained that if the current favorable consumption and employment trends continue, the core inflation impact from accumulated cost pressures may persist longer than expected.

The Bank of Korea emphasized, "Since consumer prices and core inflation exceeding the target level are expected to continue for a considerable period, it is necessary to carefully monitor changes in inflation conditions and their future impacts while paying attention to upside risks."