When Korea's "GDP gap ratio," which shows how overheated or sluggish the economy is, rises by 1 percentage point, the core inflation rate (excluding food and energy) increases by 0.1–0.4 percentage point, according to a Bank of Korea study released on the 30th. A positive GDP gap ratio means an overheated economy with inflation, while a negative value indicates a recession with stronger deflationary pressure.
The Bank of Korea cites the GDP gap ratio as one reason it raised the base rate in both July and August. With semiconductor exports strong and major companies' operating profits surging, it judged that consumption and investment would expand and push up prices. Bank of Korea Governor Shin Hyun-song said at a press conference after deciding on the 27th to raise the rate by 0.25 percentage point to 3% that the timing of the GDP gap ratio turning positive would come sooner.
According to an analytical report the Bank of Korea released that day titled "The impact of demand-driven price pressures on core inflation," there have been four periods since 2000 when the core inflation rate exceeded 2.5% and the GDP gap ratio was positive, similar to recent economic conditions.
The Bank of Korea's analysis of those periods found a tendency for domestic demand to become more active as household consumption capacity expanded. As wages rose, people spent more. Then prices increased for some products in particular. Companies responded to rising expense by raising prices.
When prices for some products go up, a synchronization effect also appears in which prices for other products rise together. The Bank of Korea found that this effect becomes more pronounced when, as recently, the core inflation rate exceeds the mid-2% range.
The Bank of Korea also expects prices to be pushed up by the fact that real gross domestic income (GDI) in the first quarter rose 15.6% from a year earlier. It analyzed that, depending on how strongly the increased income flows into consumption rather than savings, the core inflation rate rises by as little as 0.05 percentage point and as much as 0.2 percentage point.
A Bank of Korea official said, "If the core inflation rate exceeds the mid-2% range, price synchronization across items could intensify, spreading the uptrend in prices to a broader range of items," adding, "We also need to closely examine the effect and speed at which income growth ripples through to domestic consumption."