The Bank of Korea: "December Inflation Rate Similar to November or Slightly ↓... Approaching 2% by End of Next Year"

Price Stability Target Operation Status Report
"The Pace of Inflation Slowdown Will Be Gradual"

The Bank of Korea expects the consumer price inflation rate in December to be similar to or slightly lower than that of November, gradually approaching around 2% by the end of next year. Although the consumer price inflation rate significantly slowed to 3.3% in November due to declines in oil and agricultural product prices, it is anticipated that such a rapid decrease will be difficult to sustain going forward.

On the 20th, the Bank of Korea stated in its "Price Stability Target Operation Status Review Report" that "the inflation rate is expected to continue slowing down as supply shock effects gradually diminish amid weakened demand-side pressures, provided that oil prices do not rise sharply again; however, the pace of this slowdown will be moderate."

The consumer price inflation rate clearly decelerated after peaking at 6.3% in July last year, then rebounded sharply from August this year due to increases in international oil prices, exchange rates, agricultural product prices, and the fading of base effects. However, in November, with declines in oil and agricultural product prices, it fell to the low-to-mid 3% range.

The core inflation rate (excluding food and energy) has steadily slowed since the end of last year as the impacts of the pandemic and war gradually eased and domestic demand weakened this year. However, the slowdown has been moderate due to the continued ripple effects of accumulated cost pressures. Monthly data show a rigid trend within the 3.8% to 4.0% range until May, followed by a significant drop to 3.3% in June, and then a gradual slowdown to 2.9% in November.

In the second half of this year, agricultural products and petroleum acted as upward factors for the consumer price inflation rate compared to the first half, while industrial products excluding petroleum and services continued their slowing trend, acting as downward factors. The Bank of Korea explained, "Agricultural, livestock, fishery products, and petroleum raised the consumer price inflation rate by 0.4 percentage points in the second half compared to the first half, whereas services, industrial products excluding petroleum, and electricity, gas, and water lowered it by about 1.1 percentage points."

The Bank of Korea expects that, barring additional supply shocks, the inflation rate will continue a moderate slowing trend as demand-side pressures weaken and cost pressures gradually ease. It is anticipated to approach 2% toward the end of next year, but uncertainties remain high regarding the future outlook, including trends in international oil prices, domestic and global economic conditions, and the impact of cost pressures.

Looking at global inflation, major countries' inflation rates have been trending downward since the second half of last year. The United States saw a slight rebound in the third quarter of this year due to sharp fluctuations in oil prices and the fading of base effects but resumed a slowing trend in the fourth quarter. In the Eurozone and the United Kingdom, where the peak inflation period was relatively later, the slowing trend has continued until recently. Core inflation is steadily slowing in most major countries, but the pace is slower compared to consumer price inflation.

Choi Chang-ho, Director of the Bank of Korea's Research Department, said, "Inflationary pressures from domestic demand, such as private consumption, are expected to be limited going forward," adding, "From the government policy perspective, gradual increases in electricity and city gas rates and reductions in fuel tax cuts may act as factors that somewhat slow the inflation deceleration trend next year."

Earlier, in last month's revised economic outlook, the Bank of Korea raised its consumer price inflation forecast for this year from 3.5% to 3.6%. The forecast for core inflation this year was also raised from 3.4% to 3.5%.