SEOUL — South Korea’s central bank said demand-side price pressure across the economy will possibly keep inflation high for a longer-than-expected period.
In a research paper released on Wednesday, the Bank of Korea said the positive correlation between the output gap and core inflation has grown stronger since the pandemic, which is expected to keep consumer prices on an upward trajectory for a longer time frame than in the past.
“There is a possibility of core inflation continuing its upward trend for a considerable period of time as the gap between real and potential gross domestic product (GDP) will swing to the positive territory this year and remain there through next year, unlike in major countries like the United States and euro zone,” the BOK said.
South Korea’s annual consumer inflation softened in August for the first time in seven months to 5.7%, after hitting a near 24-year high of 6.3%, but core inflation accelerated further to 4.0%, the fastest in 13-1/2 years.
The BOK has a mid-term inflation target of 2%.
On the supply side, the central bank said uncertainty remains high given possibility of a rebound in oil and food prices after Russia halted gas supplies to Europe as well as due to unfavorable weather conditions.
“There is a need for continued policy response to stabilize inflation expectations, as inflation is expected to stay high at 5-6% level for the time being, with consumers’ expectations also remaining high at 4% level,” the BOK said. (Reporting by Jihoon Lee Editing by Shri Navaratnam)