🚨 Price Stability Continues: Bank of Korea "Late 1% Range to Continue in Second Half"

Today Korean Economic News | 2025.06.19

📌 Oil and Agricultural Product Price Slowdowns Stabilize Prices, Inflation Expectations Also Show Steady Flow

💬 The Bank of Korea announced on the 18th in its "Price Stability Target Operation Status Review" report that consumer price inflation fell from 2.2% at the beginning of the year to 1.9% in May. Oil and agricultural product price slowdowns were the main reasons, and inflation expectations are also showing stable flows with short-term at 2.6% and long-term expert expectations at 1.8%. The Bank of Korea expects prices to maintain the late 1% range in the second half when considering low demand pressure, exchange rate stability, and tariff and oil price changes. This is close to the Bank of Korea's price stability target of 2% and is seen as a positive signal for monetary policy operations.

1️⃣ Easy to Understand

This is good news that Korea's prices are becoming stable. Since the beginning of this year, the price increase rate has been slowly falling, which means household costs may decrease.

The term "price increase rate" might be difficult, but simply put, it shows "how much more expensive things are compared to the same time last year." For example, if ramen that cost 1,000 won last year now costs 1,020 won, the price increase rate is 2%.

In January this year, the price increase rate was 2.2%, but in May it fell to 1.9%. This means the speed at which prices are rising is getting slower. Especially oil prices and agricultural product prices became much more stable, which lowered the overall price increase rate.

The Bank of Korea is the organization that manages our country's prices, and it aims to keep the price increase rate at around 2% per year. The 2% number is important because this level is considered the right price increase rate when the economy grows healthily. If it's too high, household costs increase, and if it's too low, the economy can slow down.

The current 1.9% is very close to the target of 2%, so the Bank of Korea is very satisfied with this result. Even better news is that this stability is expected to continue in the second half of the year.

When prices become stable like this, it has good effects on our lives. Living costs decrease, and the Bank of Korea has room to lower interest rates, which can reduce loan interest costs. This is especially good news for ordinary people who have suffered from high prices.

If this stability continues, it is expected to be a positive signal for our economy.

2️⃣ Economic Terms

📕 Consumer Price Index (CPI)

The Consumer Price Index measures price changes of goods and services that ordinary consumers buy.

• It includes prices of items we use daily like food, housing, transportation, and medical costs.
• It shows how much prices have risen compared to the same month last year as a percentage, called the "inflation rate."
• It is one of the most important indicators for the Bank of Korea's monetary policy decisions.

📕 Inflation Targeting System

Inflation targeting is a monetary policy method where the central bank tries to keep the inflation rate at a specific level.

• The Bank of Korea aims to maintain consumer price inflation at 2% per year.
• To achieve this goal, it adjusts the base interest rate to control the money supply in the market.
• If prices are higher than the target, it raises interest rates; if lower, it lowers interest rates.

📕 Inflation Expectations

Inflation expectations show how much ordinary people and experts expect prices to rise in the future.

• Short-term inflation expectations mean price forecasts for the next year, while long-term means 5-10 years.
• People's expectations affect actual prices, so it's managed as an important indicator.
• When inflation expectations are stable, actual prices are more likely to be stable too.

📕 Core Inflation

Core inflation means the inflation rate excluding food and energy (oil) prices.

• Food and oil prices are greatly affected by external factors like weather or international raw material prices, so they change a lot.
• Core inflation excluding these items is considered to show the economy's basic price trends more accurately.
• Central banks consider core inflation important when making monetary policy decisions.

3️⃣ Principles and Economic Outlook

✅ Main Causes of Price Decline and Structural Changes

• Let's analyze the specific causes of this year's first half price stability and its meaning.

  • First, oil price stability was the key factor in price decline. International oil prices stabilized at $70-80 per barrel, greatly reducing domestic fuel price pressure. Oil prices that once exceeded $90 due to Middle East tensions in the second half of last year have shown stability this year. Especially gasoline and diesel prices fell more than 5% compared to last year, reducing transportation costs. This led to lower shipping costs, which also lowered distribution costs for other goods. Since oil prices have very large effects on overall prices, stability in this sector played a decisive role in overall price stability.

  • Second, agricultural and marine product price slowdowns helped improve felt inflation. Unlike the second half of last year when major agricultural products like cabbage, radish, and apples saw sharp price increases, this year has seen relatively stable supply. Especially the government's tariff quota expansion and reserve release policies were effective, greatly reducing agricultural product price increases. For marine products, there was temporary supply instability due to Japan's Fukushima contaminated water release issue, but prices stabilized through securing alternative suppliers and import diversification. Agricultural and marine products are items that ordinary people encounter daily, so they greatly affect felt inflation. Stability in this sector greatly contributed to improving general public perception of prices.

  • Third, domestic economic slowdown acted as demand-side price stability pressure. With high interest rates and household debt burdens, consumer sentiment weakened, reducing overall demand pressure. Especially in durable goods and service sectors, room for price increases was limited. The slowdown in service price increases like dining out, beauty, and leisure costs are typical examples. While this is good news for consumers, it's also a worrying signal for economic growth. If price stability due to insufficient demand continues, deflation risks cannot be ruled out.

• Price stability is the result of both structural and temporary factors working together. Oil and agricultural product price stability are positive factors, but demand slowdown due to domestic contraction is something to watch carefully.

✅ Importance and Meaning of Stable Inflation Expectations

• Let's look at the economic meaning of stable inflation expectation indicators.

  • First, short-term inflation expectations of 2.6% are stable numbers close to the Bank of Korea's target level. In surveys of ordinary citizens, they expected the inflation rate for the next year to be 2.6%. This decreased from the 3% range last year, showing that recent price stability is reflected in public perception too. What's especially important is that this number doesn't deviate much from the Bank of Korea's price target of 2%. If inflation expectations are too high, actual price increase pressure can grow through a "self-fulfilling prophecy" effect, but currently this risk has decreased considerably.

  • Second, long-term expert inflation expectations of 1.8% show confidence in price stability. Economic experts expecting inflation to be 1.8% over the next 5-10 years means high trust in the Bank of Korea's price management ability. This is a low inflation expectation at developed country levels, suggesting that Korea's economic stability has greatly improved. When long-term inflation expectations are stable, companies can more easily make long-term investment plans, and wage increase pressure also decreases, raising overall economic stability. This is especially encouraging for Korea, which experienced high inflation in the past.

  • Third, stable inflation expectations create a favorable environment for monetary policy operations. When inflation expectations are stable, the Bank of Korea can operate interest rate policy more flexibly according to economic conditions. If inflation expectations were high, it would be difficult to lower rates even when the economy is struggling, but with current stability, economic stimulus through rate cuts is possible when needed. In fact, recent discussions within the Bank of Korea about possible rate cuts are due to this background. Stable inflation expectations increase monetary policy predictability and also reduce financial market volatility.

• Stable inflation expectations are an important indicator showing successful price management and will be a great asset for future economic policy operations.

✅ Second Half Price Outlook and Risk Factors

• Let's comprehensively analyze second half price outlook and potential risk factors.

  • First, let's look at the basis and feasibility of the late 1% range price forecast. The Bank of Korea expects prices to maintain the late 1% range in the second half because several positive factors are expected to continue. International oil prices are expected to remain stable at current levels for the time being, and US monetary policy is likely to gradually shift to an easing stance. Domestically, the government's people's livelihood stability policies will continue, and agricultural product supply management will be systematically implemented. However, for this forecast to be realized, domestic and international economic environments must not differ greatly from the present. Especially external variables like Middle East situations or China's economic conditions must be stably managed.

  • Second, we must carefully watch how exchange rate volatility will affect second half prices. Currently the won/dollar exchange rate shows relatively stable movement around 1,380 won, but volatility could expand anytime if US political uncertainty or global economic slowdown concerns grow. If won weakness continues, it could lead to higher import raw material prices, increasing price increase pressure. Especially given Korea's high dependence on energy and raw material imports, exchange rate stability is a key element of price stability. The Bank of Korea and government are suppressing rapid exchange rate changes through foreign exchange market intervention, but pressure from global capital flow changes still exists.

  • Third, structural inflation pressure and deflation risks exist simultaneously. On the positive side, wage increase rates are slowing, reducing cost increase pressure. However, there are also structural inflation factors like service sector labor cost increases due to aging and energy transition costs from carbon neutrality policies. Conversely, deflation risks from insufficient demand cannot be ruled out as domestic stagnation continues. Especially if real estate market stagnation is prolonged, asset deflation could transfer to general prices. Therefore, it's important to balance management of both risks in the second half.

• The second half price stability outlook is currently optimistic, but it could change according to various internal and external variables, requiring continuous monitoring.

4️⃣ In Conclusion

The Bank of Korea's price stability diagnosis is a very encouraging signal for our economy. The inflation rate falling from 2.2% at the beginning of the year to 1.9% in May is close to the Bank's target of 2%, showing that monetary policy has been effective.

Especially, oil and agricultural/marine product price stability leading the price decline is very positive. This means temporary price increases from external shocks are calming down, and ordinary people's living cost burdens are expected to decrease. Inflation expectation indicators also show stability, making continued price stability likely.

The forecast that late 1% range prices will be maintained in the second half provides several policy implications. First, the Bank of Korea has secured room for economic stimulus through rate cuts when needed. With price stability reducing monetary policy constraints, flexible responses according to economic conditions became possible.

However, we must carefully watch that demand slowdown from domestic stagnation partly contributed to price stability. This could be a negative factor for economic growth, so it's important to pursue both price stability and growth through appropriate policy combinations.

Various external variables like exchange rate volatility, international raw material prices, and Middle East situations could still affect prices. Therefore, continuous monitoring and proactive responses will be needed to maintain current stability.

Price stability is the foundation of economic stability. If current positive trends continue, a foundation for Korea's economy to enter a more stable and sustainable growth path is expected to be established.