The Bank of Korea expects the current consumer price inflation rate, which remains in the early to mid-1% range, to rise to the upper 1% range in the first half of next year. Predictions also suggest reaching the price stability target level of 2% from the second half of next year. Factors such as the recent sharp rise in the won-dollar exchange rate, potential increases in public utility rates, and recovery in domestic demand are expected to act as factors driving inflation higher.
On the 18th, the Bank of Korea released a report titled "Review of Price Stability Target Operations" containing this information. The Bank of Korea analyzes and announces the price situation and future price trends in June and December each year.
◇ consumer prices remain in the 1% range... Agricultural and industrial product growth rates "plummet"
According to the Bank of Korea, the inflation trend has been slowing this year. The average consumer price inflation rate from January to November was 2.4% year-on-year, significantly lower than the previous year's rate of 3.6%. In the first quarter, due to the rising trend in agricultural product prices, the inflation rate was around 3%, but as agricultural product prices fell, it has maintained a 1% range since September.
The core inflation rate, which shows the underlying trend of prices (excluding food and energy), is also showing a gentle slowdown due to low demand pressure. The core inflation rate, which rose 2.5% year-on-year in the first quarter, slowed to 2.2% in the second quarter, 2.1% in the third quarter, and 1.8% in the fourth quarter.
The slowdown in the prices of agricultural, livestock, fishery products, industrial products, and petroleum products led the decline in the inflation rate. While the prices of agricultural, livestock, and fishery products showed a nearly 10% upward trend in the first half of this year, it slowed to the 1% range due to the government's price stabilization efforts from the second half. Industrial product prices also saw a slowdown in the upward trend, particularly in durable goods, due to low demand pressure.
Although oil prices have fallen since the second half of the year, despite geopolitical risks, due to base effects from last year’s international oil price rise and concerns about a slowdown in global crude oil demand. Electricity, gas, and water utility rates saw a reduced increase due to the freeze on residential electricity rates, and service prices continue a moderate downward trend at the early 2% level.
Expected inflation, which indicates future price trends, also shows a gentle slowdown, pulling down prices. The short-term (1-year ahead) expected inflation for the public, which exceeded 3% by the second quarter of this year, fell to the upper 2% range in the third quarter, and experts' long-term expected inflation is stably maintained around the price target.
◇ inflation stabilizes in the 2% range in the second half of next year... "Low inflation possibility is small"
The Bank of Korea expects the price stability trend to continue. They projected that inflation would rise to the upper 1% range in the first half of next year and stabilize at the target level from the second half. It is also expected that the core inflation rate will stabilize around 2%.
The Bank of Korea evaluated the possibility of entering a ‘low inflation’ phase, with rates below 1%, as small. “While supply and demand-side price pressures are currently limited, the domestic economy is expected to grow at a rate of 1.9% in 2025 and 1.8% in 2026, and private consumption closely related to core inflation is also expected to show growth around 2%,” the Bank of Korea noted.
The Bank of Korea also emphasized that the upward pressure on prices remains. Supporting this is the recent mid-1400 won-level increase in the won-dollar exchange rate and rising international food and nonferrous metal prices. The exchange rate is rising due to the strong dollar and expanded domestic economic uncertainty, while international food and nonferrous metal prices are increasing due to extreme weather and the expansion of artificial intelligence (AI) demand.
The possibility of public utility rate hikes starting and the gradual recovery of private consumption, which had been sluggish, were also cited as factors that could push up prices. The government plans to raise city gas rates and industrial electricity rates from the second half of this year, and the fuel tax reduction rate will be partially reduced. Private consumption is expected to improve, driven by the recovery of household consumption capacity.
The Bank of Korea stated, "The accumulated expense pressure remains, and the strong dollar trend and extreme weather are likely to continue as upward factors," noting that international organizations such as the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) also expect the inflation rate of major countries, including Korea, to stabilize around 2% for the next two years.