South Korea reported on October 2 that the September consumer price index rose 2.9% year-on-year, down 0.2 percentage points from 3.1% in August, and up 0.3% month-on-month.

The fading base effect from telecommunications fees drove the year-on-year increase lower, but petroleum product prices continued to rise by double digits, while upward pressure on processed food and electronic product prices intensified. The Bank of Korea expects inflation to remain around 3% in October.

Telecom fee base effect fades, oil price controls suppress overall increase

The year-on-year decline in September inflation is related to the fading base effect caused by telecommunications fee discounts in the same period last year. South Korean telecom operator SK Telecom offered telecommunications fee discounts in August last year due to a customer information leak incident, which lowered the price base for that month and pushed the year-on-year increase in related prices higher in August this year. As this effect faded, the year-on-year increase in public service prices dropped from 6.5% in August to 1.5% in September.

Government oil price controls also limited the overall price increase. According to government estimates, the fuel price cap measure reduced September inflation by about 0.6 percentage points; without this measure, the year-on-year increase could have reached 3.5%.

Nevertheless, petroleum product prices still rose 14.8% year-on-year in September, with diesel up 20% and gasoline up 11.8%. Energy prices remain an important source of inflationary pressure in South Korea.

Agricultural product prices still below last year, food and electronic product increases widen

September agricultural, forestry, livestock and fishery product prices fell 0.3% year-on-year, but the decline narrowed significantly from 2.6% in August. Agricultural product prices fell 4% year-on-year, with fruits down 10.9%; livestock and fishery product prices rose 3.7% and 4.5% respectively.

Processed food prices rose 2.1% year-on-year, higher than 1.5% in August. Factory prices for products such as bread, ready-to-eat meals and frozen foods increased, gradually passing through to the retail level.

Durable consumer goods prices also saw their year-on-year increase widen from 4.1% in August to 4.9%. Among them, computer prices rose 27.4% and mobile phone prices rose 8.3%, affected by rising semiconductor costs and higher pricing for new phone models, respectively.

Core CPI, which excludes food and energy, rose 2.8% year-on-year. The Bank of Korea noted that the fading telecommunications fee base effect lowered some year-on-year indicators, but cost pass-through to service and consumer goods prices is still ongoing.

Central bank expects October to remain around 3%

Bank of Korea Deputy Governor Lee Ji-ho said at an October 2 price situation review meeting that consumer price growth in October is expected to remain around 3%. Cost pressures continue to pass through, and combined with strengthening demand pressures, upward pressure on core inflation may persist.

The central bank is particularly focused on personal service prices such as airfare and tourism, as well as the pass-through of semiconductor price increases to electronic durable consumer goods, while continuing to assess the impact of the Middle East situation on energy prices.

After raising interest rates in July, the Bank of Korea raised the benchmark rate again by 25 basis points to 3% on August 27. At that time, the central bank judged that inflation would continue to exceed the target level and revised up its core inflation forecast. The central bank said the timing and magnitude of future rate hikes will depend on inflation, the domestic economy and financial stability conditions.