Consumers shop at a grocery store in Seoul on May 6. [YONHAP]
Korea's inflation is accelerating again as war-driven oil shocks ripple through the economy, with the Bank of Korea (BOK) openly weighing a shift from rate cuts to rate hikes as price pressures show no sign of easing.
April consumer price index jumped 2.6 percent on year, the highest reading since July 2024, according to data released Wednesday by the BOK and the Ministry of Data and Statistics.
Inflation had been slowing earlier this year, running at 2.0 percent in both January and February. But the war in the Middle East reversed that trend: prices rose 2.2 percent in March, then accelerated by another 0.4 percentage points in a single month.
The primary driver is fuel. Gasoline prices surged 21.1 percent, diesel 30.8 percent and kerosene 18.7 percent — pushing the overall petroleum price index up 21.9 percent. That fuel spike alone added 0.84 percentage points to the headline inflation figure. The last time oil product prices rose this sharply was July 2022, during the height of the Russia-Ukraine war shock.
Energy-linked prices across the broader economy moved in tandem. International airfares rose 15.9 percent. Engine oil change fees climbed 11.6 percent. Laundry service prices went up 8.9 percent.
More concerning for policymakers is what's happening to expectations. Public inflation expectations for the next twelve months have risen to 2.9 percent — a signal that the oil shock is beginning to bleed into services and core prices more broadly, a phenomenon economists call second-round effects.
Markets are warning that what Korea has experienced so far may be only a preview.
One reason oil prices haven't risen even further is that countries have been drawing on strategic petroleum reserves and existing crude stockpiles to cushion the blow. But analysts say those buffers are running low as the conflict drags on.
The London-based outlet Financial Times recently identified the end of May as a potential tipping point, reporting that the blockade of the Strait of Hormuz has pushed global crude inventories toward dangerously low levels. Brent crude, a major global benchmark for oil prices, is currently trading around $110 per barrel; some forecasts suggest it could climb to $130–$140 per barrel.
"May inflation will rise further as petroleum prices remain elevated, compounded by base effects from agricultural, livestock and fishery product prices," The BOK's own price monitoring committee said Wednesday.
Products for auto-engine parts are on display at a maintenance center in Seoul on May 6. [YONHAP]
Chief economist at Korea Investment & Securities Choi Ji-uk projected that consumer price inflation could hit the 3 percent range as early as May or as late as June.
“Core inflation, excluding food and energy, could also reach the mid-2 percent range starting in July,” he added.
The inflation surge is forcing a rethink on monetary policy.
BOK's Senior Deputy Governor Ryoo Sang-dai said on Monday that it is time to "stop cutting rates and consider raising them" — the clearest signal yet that the central bank may shift to tightening mode.
The markets do not expect an immediate rate hike at the BOK's Monetary Policy Board meeting on May 28, but analysts say the board will likely send a strong hawkish message.
Fixed Income Strategist Park Jun-oo, at Hana Securities, says the May meeting's dot plot — a chart showing individual committee members' rate projections, with three dots for each of the board's seven members — could indicate if and when a hike is coming.
“If the number of projections favoring a rate hike in the May dot plot is seven or fewer, it could be interpreted as a signal of a prolonged rate hold; around 11 would suggest a fourth-quarter hike; and around 14 would indicate a pre-emptive third-quarter hike,” he said.
Consumers shop at a grocery store in Seoul on May 6. [YONHAP]
Korea is not alone. Central banks around the world are tilting tough in response to the same inflationary pressures.
The Reserve Bank of Australia has already moved to raise rates. The U.S. Federal Reserve and the European Central Bank are both maintaining what markets describe as a hawkish hold — keeping rates steady while signaling readiness to tighten further. The yield on U.S. 30-year Treasury bonds has again crossed the 5 percent threshold, reflecting broader market anxiety about the inflation outlook.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
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