South Korea’s inflation picks up as political fallout spreads

SEOUL – South Korea’s consumer inflation gained pace as political turmoil weighs on the local currency, threatening price stability in a country heavily reliant on imports for food and energy.

The consumer price index rose 1.9 per cent in December from a year earlier, after a rise of 1.5 per cent in November, Statistics Korea data showed on Dec 31.

It was the fastest year-on-year rise in four months and topped a median 1.7 per cent increase forecast in a Reuters survey of economists.

“Although price pressures are being limited by sluggish domestic demand, it is necessary to keep in mind that the won’s continued weakness might pressure import prices and affect consumer prices with a time lag,” said economist Chun Kyu-yeon at Hana Securities.

In December, the won weakened 5.2 per cent against the US dollar, the biggest monthly drop in 22 months, as heightened domestic political uncertainty added to the drag.

Following the release of the data, the Bank of Korea (BOK) said there was a possibility of inflation quickening more in January, driven by recent weakness in the local currency.

Still, it is expected to stay below 2 per cent from February due to weak demand-side pressure, it added.

The latest data complicates the policy equation for the BOK, possibly limiting its room for reducing its benchmark interest rate in 2025 following back-to-back cuts in October and November.

Policymakers are also concerned that economic growth may weaken further due to the political turmoil sparked by President Yoon Suk Yeol’s brief imposition of martial law, which ultimately led to his impeachment. 

“The impact on inflation from a weaker currency may grow in coming months, but the biggest worry at the moment is withering consumer sentiment,” said analyst Ahn Jae-kyun at Shinhan Investment.

“January is likely the right timing for a rate cut, given both production and consumption are languishing.”

The nation’s challenges were further compounded by a deadly plane crash on Dec 29, which killed all but two of the 181 people on board. Acting President Choi Sang-mok has declared a week-long mourning period through Jan 4, which may weigh on consumer sentiment.

BOK governor Rhee Chang-yong said even before the disaster that the economy in 2025 may be unable to grow 1.9 per cent as forecast previously.

Economists see weak private spending, a cooling export rally and deteriorating consumer confidence as factors driving the BOK to accelerate its easing in 2025. The actions of global central banks, including the US Federal Reserve, in the coming months will also play a role in shaping the BOK’s decisions.

Consumer prices rose sharply in 2023 after the South Korean government implemented stimulus to shore up growth during the Covid-19 pandemic.

For the whole of 2024, consumer prices rose 2.3 per cent, after rising 3.6 per cent in 2023. BLOOMBERG, REUTERS