South Korean Prices Fail to Rise as Pandemic Drags on

(Bloomberg) -- South Korean consumer prices failed to rise in June despite cash handouts from the government to spur spending, another sign of how hard the pandemic has hit the economy.

Consumer prices were unchanged from a year earlier, data from the statistics office showed Thursday. Economists had expected a 0.2% decline.

Any boost to consumer sentiment from the government's aid to households may have been muted by the emergence of new virus clusters last month that have made people cautious about venturing out. Still, the stimulus likely helped South Korea avoid a second consecutive month of negative core inflation.

“Fiscal policy lent support,” said economist Park Chong-hoon at Standard Chartered Bank Korea. “That doesn't mean the economy is back on track, but the cash handouts at least kept deflationary pressures from deepening.”

South Korea has struggled with low inflation for several years but managed to avoid any prolonged spell of falling prices. That could change if the pandemic drags on as the boost from the government's cash aid to households weakens. The handouts expire at the end of August.

Key Insights

• Thursday's data may put pressure on the Bank of Korea to do more. BOK Governor Lee Ju-yeol said last month he expects consumer prices to stay around 0% for the time being. For the full year, the central bank forecasts inflation slowing to 0.3% and gross domestic output shrinking 0.2%.
• The deteriorating job market is likely to be weighing on prices. Hundreds of thousands of jobs have been shed in recent months, especially in retail and other service businesses. The government has pledged tens of trillions of won to create employment in industries such as technology and renewable energy.
• The emergence of new virus clusters may have cast a chill on shoppers. South Korea flattened its infection curve months ago, but dozens of new cases are now being reported daily. The government is tweaking its social distancing rules to try to stem new waves while keeping the economy open.
• Rebounds in other major economies as lockdowns ease would support inflation in trade-reliant South Korea.

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• From the previous month, consumer prices rose 0.2% in June.
• Core inflation rose by 0.6% from a year earlier.

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