South Korea's consumer price index (CPI) rose at the fastest pace since July 2024, driven by a significant pass-through of rising energy costs into the domestic economy. Data released by Statistics Korea on Wednesday showed that CPI increased 2.6% year-on-year in April, up from 2.2% in March. The figure matched the median estimate of economists.
Excluding volatile food and energy prices, core inflation rose 2.2% year-on-year, indicating that underlying price pressures remain broadly manageable despite persistent external cost shocks. The inflation rate remains above the Bank of Korea's 2% target.
The strong inflation data underscores the growing impact of escalating Middle East conflicts. South Korea's import prices surged about 16% in March, the fastest increase in nearly 30 years, suggesting that sustained high oil prices and a weak currency are gradually feeding into domestic prices.
With little progress in U.S.-Iran negotiations, concerns that the Strait of Hormuz may remain closed have pushed oil prices up more than 25% over the past two weeks. Before the Middle East conflict, the strait handled about one-fifth of global crude oil shipments.
Against this backdrop, inflation expectations have strengthened. An index tracking price level expectations for the coming year has climbed to its highest since early 2023, while the expected inflation rate for the next year has also risen, indicating persistent household concerns.
In April, transportation prices rose 9.7% compared to the same period last year, while food and accommodation costs increased 2.6%. Housing and utility costs rose 1.7%, and prices for household goods and services increased 1.9%. Broader consumer price increases remained moderate, with communication costs rising 0.6% and food and non-alcoholic beverage prices up 0.3%.
The Bank of Korea faces mounting pressure to raise interest rates. Jeeho Yoon, an economist at BNP Paribas, stated, "While surging oil prices are boosting inflation, service sector price pressures are also emerging, driven by higher costs for domestic and international group tours and airfares. We believe the Bank of Korea may significantly raise its inflation expectations to reflect the impact of the Middle East situation; an interest rate hike is more likely in the second half of the year rather than in May."
BNP Paribas has raised its annual inflation forecast for South Korea from 2.2% to 2.5%, noting high uncertainty in the outlook depending on developments in the Iran conflict.
Wednesday's data adds further complexity to South Korea's economic landscape, potentially increasing pressure on the central bank to consider a shift toward tightening policy. Strong semiconductor exports continue to support economic growth, driving a 1.7% expansion in first-quarter GDP.
New Bank of Korea Governor Shin Hyun-song warned that rising oil prices and a weaker won could push inflation higher. However, he also cautioned that price increases might weigh on economic growth at a time when domestic demand is already somewhat soft.
The central bank has held its benchmark interest rate steady at 2.5% since July last year, balancing inflation risks against economic growth and financial stability. At its latest monetary policy meeting in April, the bank emphasized a data-dependent decision-making approach.
It was reported that Senior Deputy Governor Ryoo Sang-dai said on Monday that, given inflation is rising faster than expected, it is time for the Bank of Korea to consider raising interest rates. Ryoo indicated that the bank "could" signal the need for a rate hike this year or later at its interest rate decision meeting on May 28.
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