South Korea March inflation hits decade high as supply snags worsen

SEOUL (REUTERS) - South Korea's consumer prices rose at their fastest pace in more than a decade in March as the Ukraine war fuelled surging energy and commodity costs, adding pressure to the central bank ahead of its rate decision meeting next week.

The consumer price index (CPI) for March rose 4.1 per cent from a year earlier, official data showed on Tuesday (April 5), the fastest increase since December 2011 and outpacing a 3.8 per cent rise tipped in a Reuters poll.

Core inflation, which excludes volatile food and energy costs, also jumped 2.9 per cent from a year earlier, staying at the rate seen in February. The sustained rise in core prices shows surging fuel and raw materials costs are feeding through to consumers.

"We do not see the upward trend in inflation slowing significantly next month," said senior Statistics Korea official Eo Woon-sun. 

He added that global supply disruptions could worsen amid the Russia-Ukraine war and prices for personal services such as eating out continued to rise.

The breakdown of data showed the cost of petroleum surged 31.2 per cent, while that of housing rentals increased 2 per cent and outdoor dining rose 6.6 per cent, on year. The cost of electricity, gas and water added 2.9 per cent.

That puts the Bank of Korea's (BOK) monetary policy board under pressure to raise its benchmark interest rate even higher. It has hiked rates a total 75 basis points since the pandemic.

While analysts do not yet expect the BOK to raise rates at its next policy meeting on April 14, the March inflation print, which is double the central bank's 2 per cent target, means a hike next week is not impossible.

The government last month nominated veteran Asian Development Bank official Rhee Chang-yong as new BOK governor, though he is yet to assume office.

Last week, Mr Rhee said he sees inflation outpacing the bank's 3.1 per cent forecast in the first half of this year.

On Monday, BOK senior deputy governor Lee Seung-heon said this month's policy review will be challenging, due to the twin risks of higher inflation and downward pressure on growth.

The bank's current base rate stands at 1.25 per cent, after policymakers stood pat at the last meeting in February following back-to-back hikes.

Analysts had expected the BOK to resume raising interest rates from the current quarter to take the base rate to 1.75 per cent by the end of the year, but the acceleration in inflation may require such tightening to be front-loaded.

Separately on Tuesday, the government said it will expand tax cuts on oil products by 30 per cent, from the current 20 per cent, for three months to minimise the impact of soaring energy prices.