"Even Travel Expenses Are Rising"... Persistent Inflation Increases Rate Hike Pressure

May Consumer Prices Rise 3.1%
Prolonged War Spurs Petroleum Product Prices
Inflation Spreads to Services... "Higher Likelihood of Additional Rate Hikes in Early Next Year"

Securities analysts have noted that higher-than-expected consumer prices are increasing the pressure to raise the base interest rate. With prolonged conflict between the United States and Iran driving up fuel and other costs, prices for airfares, travel, and services are rising, making it unlikely that inflation will subside easily.

Product and Dining-Out Costs Also a Variable in the Second Half

According to Korea Investment & Securities on June 4, researcher Choi Ji-uk recently stated, "The consumer price index (CPI) rose by 0.5% month-on-month and 3.1% year-on-year in May, surpassing the market forecast of 2.9%."

The analysis found that increased energy costs due to the prolonged U.S.-Iran conflict have pushed up service prices such as airfares and travel expenses. Although the government provided discount support for 4,373 processed food items throughout May, processed food prices only declined by 0.1% compared to the previous month.

Choi pointed out, "Domestic and international airfares, overseas group travel expenses, passenger car rental fees, and laundry fees—all of which are directly and indirectly linked to rising petroleum product prices—have been driving the increase in core inflation (the index excluding food and energy)." Overseas group travel expenses rose by 11.8% month-on-month, passenger car rental fees by 16.5%, and laundry fees by 2.4%.

He also projected that inflationary pressures will persist in June. Choi said, "The consumer price index for June is expected to remain in the low 3% range, specifically between 3.1% and 3.3%." He emphasized the need to monitor whether the upward trend in egg prices continues in the agricultural, livestock, and fisheries sectors, as well as the potential for vegetable price increases due to heat waves. Although agricultural product prices typically drop in June compared to May, this decline may be limited due to weather-related variables such as heat waves.

Of particular note is the rise in core inflation. Choi stated, "The growth rate of cosmetic and durable goods prices will continue to increase, and the inflation rate for textile products is also likely to rise considering producer price trends." He added, "While dining-out prices are currently stable, the upward pressure is expected to intensify in the second half of the year due to rising prices for agricultural, livestock, and fisheries products and an increase in foreign tourists."

Greater Likelihood of Further Rate Hikes

Korea Investment & Securities maintained its consumer price inflation forecasts for this year and next at 2.7% and 2.3%, respectively. However, it raised its core CPI forecasts for both years by 0.1 percentage points, to 2.6%. The firm expects headline inflation to peak in the third quarter of this year and core inflation to peak in the first quarter of next year, after which both are projected to gradually slow down.

If inflation does not subside easily, the Bank of Korea will face greater pressure to raise its base interest rate. Choi said, "We maintain the existing projection that the Bank of Korea will raise the base interest rate twice—once in July and once in October this year—bringing the final rate to 3.00%. However, considering the ongoing rise in core inflation, there is a growing possibility of additional hikes in the first half of next year."

The possibility of the government introducing additional measures to control the cost of living is also being discussed. Choi added, "The government and ruling party may unveil bolder price stabilization measures in response to rising living costs. Leveraging excess tax revenue from the semiconductor boom, they may provide public utility subsidies and other measures to help manage the consumer price inflation rate."

This content was produced with the assistance of AI translation services.