Korea’s Inflation Picks Up Amid Higher Food, Oil Prices

(Bloomberg) -- South Korea's inflation picked up in February as holiday demand drove up food prices while global oil prices remained elevated.

Inflation reached 1.1% from a year earlier, accelerating from 0.6% in January, data from the statistics office showed Thursday, the highest since a year ago. Economists had expected a reading of 1%.

Demand for fresh food tends to surge when Koreans celebrate the Lunar New Holiday and harsh winter weather has strained agricultural output. Rising oil prices likely added supply-side pressure, even as local Covid-19 outbreaks and social distancing restrictions put a lid on overall price gains.

In a separate report, the Bank of Korea said the economy grew 1.2% last quarter from the previous three month, faster than its initial estimate. Exports, consumption and facilities investments grew more than initially thought, while intellectual property production was revised down. The economy still contracted 1% for the year as estimated earlier.

Key Insights

• The BOK last week raised its inflation forecast for this year from 1% to 1.3%, citing a gradual economic recovery and higher global oil prices. The revised projection still falls far short of the central bank's 2% target and Governor Lee Ju-yeol downplayed concerns about runaway price gains. Growth outlook was maintained at 3%.
• The February readings “aren't enough to say inflationary pressures are back,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities. “As long as the annual inflation stays below 2%, which it likely will this year, it won't be enough to affect BOK decisions.”
• The economy is showing signs of an accelerating recovery. Manufacturing activity expanded at the fastest pace in more than a decade in February, while exports, led by semiconductors, extended gains to a fourth straight month.
• A 15 trillion won ($13.4 billion) extra budget proposal, if approved by lawmakers, may put a floor under consumption with cash handouts to small businesses and workers hit by the virus.

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• Compared with the previous month, consumer prices rose 0.5% in February.
• Korea's year-on-year core inflation came in at 0.8%.
• Prices of foodstuffs and non-alcoholic beverages rose 9.7% from a year earlier; Utility costs including electricity and energy increased 0.1%; Education prices fell 2.9%.
• The BOK's updated GDP report showed the economy shrank 1.2% last quarter from a year earlier, less than the earlier estimate.

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