Increased Risk of Inflation Spread if Core Inflation Exceeds 2.5%

The Bank of Korea has released an analysis indicating that if the core inflation rate exceeds the mid-2% range, inflation could spread to various items, including personal services. In a situation where demand pressures are increasing, the response of core inflation may be larger and more persistent. According to a report from the Bank of Korea's Research Department, there is a possibility that demand-side pressures on prices will increase due to recent export growth and improvements in trade conditions affecting domestic demand. The periods since 2000 when core inflation sharply rose are classified as 2002, 2007-2008, 2011, and 2022-2024, during which strong consumer demand and the pass-through of cost increases were commonly observed. The report states that when the core inflation rate exceeds the mid-2% range, the correlation in price movements of individual items deepens, particularly noticeable in personal services. Additionally, it was analyzed that when the GDP gap increases by 1 percentage point, the inflation rate of economy-sensitive goods rises by 0.42 percentage points. In the second quarter of this year, real GDP grew by 3.7%, and real gross national income increased by 15.6%. The Bank of Korea has revised its core inflation forecast for this year and next year upward to 2.5% and raised the base rate from 2.75% to 3.00%.

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