[Edaily Reporter Lee Jeong-yoon ] Core inflation, which reflects the underlying trend in prices, has surged to its highest level in three years and three months. Even after accounting for the base effect resulting from last year’s telecommunications cost subsidies, actual core inflation remains in the mid-to-high 2% range, exceeding the Bank of Korea’s price stability target of 2%.

In particular, if the economic recovery and rising incomes lead to increased consumption, the pace of decline in core inflation could slow. Consequently, the speed at which core inflation falls in September and October is expected to be a key factor in determining whether the Bank of Korea will raise the benchmark interest rate further.

◇Core Inflation in the Mid-to-High 2% Range Even After Adjusting for Telecommunications Costs

According to the National Data Agency on the 2nd, core inflation—excluding food and energy—rose 3.4% in August compared to the same month last year. This is 0.8 percentage points higher than in July (2.6%) and marks the highest level in three years and three months, since May 2023 (3.8%). The overall consumer price inflation rate also rose from 2.8% to 3.1%.

The sudden jump in the core inflation rate to the mid-3% range within a single month was driven by a base effect resulting from last year’s telecommunications cost subsidies. Analysts note that mobile phone rates—which had temporarily fallen in August of last year—surged 26.8% year-over-year this August, pushing up the core inflation rate.

Market analysts estimate that the core inflation rate, excluding the base effect from telecommunications costs, is in the mid-to-high 2% range. Cho Jun-woo, an analyst at Hyundai Motor Securities, estimated the actual core inflation trend—stripped of the base effect—to be around 2.6–2.7%. While it is difficult to conclude that inflationary pressure has suddenly intensified based solely on August’s 3.4% figure, even excluding the base effect, this rate remains significantly above the Bank of Korea’s price stability target of 2%.

Inflationary pressure is also continuing in the categories that consumers actually feel in their daily lives. The living expenses index—which tracks frequently purchased items that account for a large share of household spending—jumped from 2.5% in July to 3.2% in August, and prices for personal services, which tend not to fall easily once they rise, also climbed 3.5%, showing no signs of abating.

In its economic outlook released last month, the Bank of Korea maintained its forecast for this year’s overall consumer price inflation at 2.7% but raised its core inflation forecast from 2.4% to 2.5%. It also revised next year’s forecast upward from 2.3% to 2.5%.

The Bank concluded that even if supply-side price pressures, such as those from international oil prices, ease, demand-side pressures driven by economic and consumption recovery may persist.

◇If Incomes Rise and Consumption Picks Up, Inflation Will Remain ‘Sticky’… Additional Rate Hikes a Possibility

A key variable going forward is the extent to which the economic recovery will affect consumer spending and service prices.

The Bank of Korea recently analyzed that during periods of high demand-side inflationary pressure, a 1 percentage point expansion in the GDP gap would raise the core inflation rate by 0.1 to 0.4 percentage points; furthermore, if incomes rise due to improved terms of trade—such as rising semiconductor prices—additional upward pressure of 0.05 to 0.2 percentage points could emerge.

This means that if the semiconductor boom extends beyond export growth to drive a recovery in household income and consumption, it could slow the pace of decline in core inflation.

In particular, when the core inflation rate exceeds 2.5%, the tendency for price increases in certain items to spread to other items has become more pronounced. Given that prices for personal services—such as travel and lodging—have recently been rising sharply, the Bank of Korea is wary of the possibility that core inflation could remain in the mid-to-high 2% range for a considerable period.

The key period will be after September, when the base effect from telecommunications costs fades. Once the base effect disappears, the core inflation rate itself is likely to drop significantly; however, if prices for personal services continue to rise sharply, core inflation may decline more slowly than overall consumer prices.

Lee Seung-hoon, an analyst at Meritz Securities, said, “Core inflation is more rigid than headline inflation,” adding, “It is crucial to see how much prices for personal services—excluding dining out—will ease.”

Cho Jun-woo, an analyst at Hyundai Motor Securities, also noted, “Excluding the base effect from August telecommunications costs, the actual core inflation trend stands at around 2.6–2.7 percent,” and assessed that “even after the base effect fades, downward rigidity in core inflation will remain.”

The trend in core inflation from September to October is expected to be a key factor in determining whether the Bank of Korea will raise interest rates further. Choi Ji-wook, Managing Director at State Street Markets, projected September’s consumer price index (CPI) and core inflation rates at 3.0% and 2.8%, respectively. He anticipated that core inflation would remain in the mid-to-high 2% range through the first half of next year.

Choi said, “Unless core inflation in September exceeds 3% or household debt and Seoul apartment prices rise sharply, the likelihood of an additional rate hike in October is minimal,” adding, “If inflationary pressures prove stronger than the Bank of Korea anticipates, there is a possibility of an additional hike in November.”

Cho Jae-woon, an analyst at Daishin Securities, said, “If core inflation remains at a high level in the 3% range in September and October—when the base effect from telecommunications fees subsides—it can be interpreted as ongoing inflationary pressure centered on personal services.” He added, “In this case, it would strengthen the BOK’s case for an additional rate hike.”