South Korea's inflation expected to hit 14-year high in 2022

SEOUL: South Korea's headline inflation is expected to hit a 14-year high this year on growing inflationary pressures both from the demand and the supply sides, a central bank report said Tuesday.

The Bank of Korea (BOK) said in the report on situations to meet its inflation target that there was a possibility for this year's consumer price inflation to top 4.7 percent tallied in 2008 when consumer prices surged.

The BOK noted that the inflation was forecast to surpass the May outlook when considering the changed conditions such as higher global price for crude oil.

On May 26, the central bank revised up its outlook for this year's consumer price inflation by 1.4 percentage points to 4.5 percent, raising its benchmark interest rate by a quarter percentage point to 1.75 percent. It marked the fifth interest rate hike since August last year as the headline inflation far exceeded the BOK's inflation target of 2 percent.

The consumer price index (CPI) soared 5.4 percent in May from a year earlier, marking the fastest increase in almost 14 years since August 2008. The consumer price inflation surpassed 3 percent in October last year, reaching 4.1 per cent in March and 4.8 per cent in April respectively this year.

The BOK said the inflation was forecast to far exceed 5 percent for the time being due to the continued inflationary pressures both from the demand and the supply sides, driven mainly by higher global prices for crude oil and grain. Domestic demand recovery, caused by the alleviated COVID-19 pandemic, and the domestic currency's depreciation to the U.S. dollar was also projected to contribute to the runaway inflation.

The won/dollar exchange rate ended at 1,293.6 won per dollar on Tuesday, up 1.2 won from the previous close. The rate broke this year's high for the second consecutive day. Bank of Korea (BOK) Governor Rhee Chang-Yong told a press conference that the impact of external supply shocks could be prolonged given the expected trend of high global prices for crude oil and food.

He noted that unless inflation expectations are controlled properly amid concerns about the protracted inflationary pressures, high inflation could be anchored, expressing worry about the wage-price feedback in which high prices drive wages high resulting in higher prices.