South Korea's inflation hits highest since 2012 as economy recovers

South Korea's consumer confidence reached the highest in almost three years last month.
South Korea's consumer confidence reached the highest in almost three years last month.PHOTO: REUTERS

(BLOOMBERG) - South Korea's inflation rose to its highest since 2012 last month as the economy's rebound gathered pace and as last year's drop in prices offered support.

Inflation from a year earlier reached 2.6 per cent from April's 2.3 per cent, data from the statistics office showed on Wednesday. Economists had also expected consumer prices to rise 2.6 per cent.

Inflation is rising globally as surging commodity costs feed into higher consumer prices and trigger debates about when central banks might start to raise interest rates again. For the Bank of Korea, faster price gains also reflect a broadening economic recovery that adds pressure on the bank to normalise monetary policy.

The reading marks the second straight month the headline inflation exceeded the central bank's 2 per cent target. The rise was partly buoyed by the negative reading in May last year.

Key Insights

The Bank of Korea last week raised its forecast for this year's inflation to 1.8 per cent from 1.3 per cent, but kept its outlook for next year unchanged at 1.4 per cent. Governor Lee Ju-yeol flagged the need for an "orderly" exit from record low interest rates to mitigate financial risks.

The government will increase egg imports from 40 million to at least 50 million, ramp up supplies of rice and offer loans to companies to help with commodity purchases, Finance Minister Hong Nam-ki said on Facebook following the release of the inflation data. He attributed the price rise last month primarily to a base effect while noting a pick-up in service prices as consumption improves.

Inflation may temporarily rise above 2 per cent in the second quarter on base effects and supply side factors such as oil prices, Vice Finance Minister Lee Eog-weon said earlier this week.

In a sign of consumer demand gaining momentum, Korea's consumer confidence reached the highest in almost three years last month while gauges on retail sales and service production reached record levels in April.

Inflation is picking up across the global economy, buoyed by commodity and energy prices that are rebounding from last year's pandemic-driven slumps. Most central bankers have sought to play down the risks of runaway inflation, saying the price increases will be transitory.

Compared with April, consumer prices rose 0.1 per cent last month.

South Korea's core inflation came in at 1.5 per cent, versus the prior year.

Transportation costs were among the biggest drivers of gains, rising 9.2 per cent from a year earlier. Prices for foods and non-alcoholic beverages jumped 7.4 per cent. Restaurants and hotels saw prices rising 2 per cent. Communications costs fell 2.1 per cent.