South Korea’s inflation rose to its highest since 2012 in May as the economy’s rebound gathered pace, adding support to views that the central bank could be among the first in the region to start normalizing policy.
Inflation from a year earlier reached 2.6% from April’s 2.3%, according to data from the statistics office Wednesday that matched the median estimate from economists.
The data was buoyed by comparison with last year’s price drop at the onset of the pandemic. Compared with the previous month, consumer prices rose 0.1%.
Inflation is rising globally as surging commodity costs feed into higher consumer prices and trigger debates about when central banks might start to raise interest rates again.
For the Bank of Korea, faster price gains also reflect a broadening economic recovery that justifies the governor’s call for an orderly and timely exit from record-low interest rates.
The reading marks the second straight month that Korea’s headline inflation exceeded the central bank’s 2% target.
While noting the rise was partly buoyed by the negative reading in May 2020, Finance Minister Hong Nam-ki said service prices also picked up as consumption improved.
Most central bankers have sought to play down the risks of runaway inflation, saying the price increases will be transitory.
The Bank of Korea last week raised its forecast for this year’s inflation to 1.8% from 1.3%, but kept its outlook for next year unchanged at 1.4%.
While the central bank’s brighter economic outlook has prompted some analysts at banks including Citigroup and JPMorgan to forecast a rate hike this year, many still project tightening won’t start until 2022.
In the May inflation report, prices of items swayed by supply-side issues led the gains. Transportation costs jumped 9.2% in May from a year earlier while prices for food and non-alcoholic beverages rose 7.4%.
There were also signs that consumer demand is gaining momentum. Restaurants and hotels saw prices rising 2%. Entertainment costs rose 1%, although communications prices fell 2.1%.
South Korea’s core inflation from a year earlier, which removes agriculture and oil prices, edged up to 1.5%.
In a separate statement, the finance ministry said it expects inflation to moderate in June as base effects becomes less favorable.
To ease the burden from higher commodity prices, Finance Minister Hong said the government will increase egg imports from 40 million to at least 50 million, ramp up rice supplies, and offer loans to companies to help with commodity purchases.
Still, price pressures could intensify if Korea’s consumer-sector recovery picks up steam. Consumer confidence was at the highest in almost three years last month while gauges on retail sales and service production reached record levels in April.