South Korea's consumer inflation eased to a three-month low in July and came in below market expectations, driven by lower oil prices, although policymakers remain cautious about lingering inflationary pressures, according to government data released on Tuesday, as per a Reuters report.
Data from the Ministry of Data and Statistics showed the consumer price index (CPI) rose 2.8% year-on-year in July, slowing from 3.2% in June. The reading was also below the 3.0% increase forecast by economists in a Reuters poll.
On a monthly basis, consumer prices fell 0.2%, marking the first decline in eight months, compared with expectations for a 0.1% increase. The drop was largely attributed to a 5.5% fall in petroleum product prices as global crude oil prices retreated.
According to Reuters, the finance ministry estimated that nationwide fuel price caps lowered July inflation by about 0.3 percentage points. However, officials cautioned that inflationary risks remain elevated due to ongoing geopolitical uncertainties in the Middle East.
The ministry also expects inflation to receive a temporary boost of around 0.8 percentage points in August because of base effects linked to temporary mobile phone fee discounts introduced last year.
Global oil prices fell to three-week lows on Monday after U.S. President Donald Trump delayed a fresh military strike on Iran while pursuing negotiations that could potentially increase oil supplies from the Gulf, providing relief to energy markets.
Despite the softer inflation print, the Bank of Korea (BOK) indicated it would continue monitoring price developments closely. According to Reuters, the central bank expects core inflation to remain elevated as higher oil costs continue to filter through the economy alongside strengthening domestic demand, supported by robust profits in the semiconductor industry.
Market participants slightly pared expectations of another interest rate increase later this month following the inflation data, although many analysts still believe the central bank could tighten policy again.
The report stated that analysts see growing signs of demand-driven inflation emerging, even if they are not yet fully reflected in the latest economic data. With headline inflation remaining close to 3%, economists believe the BOK retains room to act pre-emptively if price pressures persist.
The Bank of Korea raised interest rates last month for the first time in three-and-a-half years and signalled that additional tightening could follow as strong economic growth in Asia's fourth-largest economy fuels inflation risks. The central bank's next monetary policy meeting is scheduled for August 27.
Following the inflation report, South Korea's policy-sensitive three-year government bond yield fell 2.3 basis points to a one-month low of 3.719% in morning trading.
Meanwhile, core inflation, which excludes volatile food and energy prices, rose 2.6% year-on-year in July, up from 2.5% in June and marking its strongest annual increase since December 2023.
