Central Banks December 02, 2019 / 02:05 am UTC

Korea Review: November CPI Rises Slightly, but Significantly Below Expectations

By Zhao Defa
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South Korea's inflation data for November fell way short of market expectations. On a y/y basis, headline inflation ticked only slightly higher to 0.2% in November from 0.0% in October. This was significantly below the market expectation of a 0.7% y/y increase. Meanwhile, core inflation slipped to 0.6% y/y in November from 0.8% y/y in October.

The contraction in food and non-alcoholic beverages, transport, communication and education prices continued to weigh on headline inflation. That being said, the contraction in prices for food and non-alcoholic beverages had softened amid rising pork prices from the mass culling of pigs due to the African swine fever.

The tapering of the high base effect, which was present in the preceding months, failed to lift inflation significantly in November. More worrying is the fact that we have yet to see the Bank of Korea's (BoK) two rate cuts transmit into the South Korean economy, with data continuing to deteriorate. This indicates the need for further stimulus from both the South Korean government and the BoK. However, given South Korea's high household debt woes, we do not expect the BoK to ease too aggressively. Instead, we believe the Bank will stand pat at 1.25% in the next three quarters and await fiscal stimulus. At the same time, risks are high for further easing if data continue to disappoint.

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Analyst Certification
I, Zhao Defa, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.