South Korea's Inflation Eases While Core Prices Keep Bank of Korea Outlook in Focus

South Korea's consumer price index (CPI) rose 2.8% year-on-year in July, easing from June's 3.2% and coming in below the 3.0% median forecast in a Reuters poll of economists, Statistics Korea reported Tuesday, marking the slowest annual pace in three months.

Key figures:

→ Month-on-month CPI fell 0.2%, the first monthly decline in eight months.

→ Petroleum product prices dropped 5.5% month-on-month, the main drag on the headline figure.

→ Core CPI (excluding food and energy) rose 2.6% year-on-year, up from 2.5% in June and the fastest pace since December 2023.

→ Government fuel price caps shaved roughly 0.3 percentage points off headline inflation.

Headline Inflation Eases While Core Inflation Accelerates: Even as headline inflation moderated, core inflation continued to rise, which some economists said may reflect underlying demand pressures alongside strength in South Korea's semiconductor sector. The Bank of Korea raised interest rates last month for the first time in three and a half years and indicated that further policy tightening remained possible, with its next meeting scheduled for Aug. 27.

"The market is pricing in a lower probability of an August hike, but it's still above 50%," said Ahn Jae-kyun, an analyst at Korea Investment Securities, who maintained an August rate increase as his base-case scenario, citing early signs of demand-driven inflation.

South Korea's policy-sensitive three-year government bond yield fell 2.3 basis points to a one-month low of 3.719%, reflecting changing market expectations for the Bank of Korea's policy outlook.

Market focus: Investors will continue to monitor core inflation, developments in South Korea's semiconductor sector, and movements in the Korean won ahead of the Bank of Korea's Aug. 27 policy meeting. These factors are expected to remain part of the market's assessment of the central bank's policy outlook.

Sources: Statistics Korea, Reuters poll of economists, Korea Investment Securities, Bank of Korea