Inflation unexpectedly slows down + weak domestic demand, South Korea's central bank's expectation of resuming interest rate cuts in October rises

According to Zhitong Finance APP, consumer inflation in South Korea has slowed to its lowest growth rate this year, and several months of inflation data show signs of weak domestic demand, which can be said to provide greater room for the Bank of Korea to resume its easing cycle at the next monetary policy meeting in October. The South Korean Statistics Office stated on Tuesday that the Consumer Price Index (CPI) rose 1.7% year-on-year, down from 2.1% in July. In contrast, economists had previously expected the price increase in South Korea to slow to about 1.9%. The unexpected slowdown in South Korean inflation is mainly attributed to a significant decrease in one-time communication fees for some users.

According to data from the South Korean Statistics Office, the core inflation index, excluding food and energy, rose 1.3% year-on-year in August, compared to 2% in July. This result is far below the 1.7% that economists generally expected, marking the slowest growth rate in four years.

Inflation unexpectedly cools—price declines provide greater room for the Bank of Korea to cut interest rates to support growth

With SK Telecom halving the mobile phone bills of over 20 million affected users after a data breach incident, communication fees fell by more than 13%, offsetting the rising pace of food costs, leading to a slowdown in price growth. This temporary impact is expected to significantly fade in September, potentially laying the groundwork for a slight upward movement in the overall price growth in South Korea.

"The decline in communication costs has pulled inflation down by over 40 basis points, causing a certain degree of distortion, so we expect the year-on-year growth rate to rebound next month," said Zhao Yongjiu, a fixed income strategist at Shinyoung Securities, in a phone interview. "Considering that consumer prices in South Korea may remain in the high 1% range in the fourth quarter, inflation is not seen as a major concern, and it is expected to stay within the central bank's 2% target for the year."

As this data is released, policymakers at the Bank of Korea are weighing the basis for introducing more policy stimulus, as businesses prepare for the potential impact of tariffs from the Trump administration.

So far, supported by strong exports of memory chips, the South Korean economy has shown resilience: under the pressure of tariffs, exports in August achieved positive growth for three consecutive months, retail sales have steadily increased over the past five years, and consumer confidence rose to a seven-year high last month.

Despite higher tariffs imposed by the United States, South Korea's export data, known as the "canary in the global economy," remains robust, supported by exceptionally strong shipments of semiconductor products and automobiles, achieving three consecutive months of growth. The latest resilient export data highlights the strong export resilience of leaders in high-end manufacturing, especially in the memory chip sector, which is crucial for South Korea's economic growth, in the face of comprehensive U.S. government tariff policies. By product category, South Korea's semiconductor exports in August increased by 27.1% year-on-year, while exports of automobiles and ships grew by 8.6% and 11.8%, respectively Concerns over the bubble-like real estate market and rising mortgage levels prompted the Bank of Korea's monetary policy committee to maintain the benchmark interest rate at 2.5% last month. Following this decision, policymakers at the Bank of Korea generally indicated that they expect price increases to remain stable.

Bank of Korea Governor Lee Chang-yong stated that the central bank has raised its inflation forecasts for this year and next to 2% and 1.9%, respectively, highlighting a cautious stance on the upward risks of inflation amid headwinds from U.S. trade measures affecting the domestic economy.

"When defining price stability, the Bank of Korea considers not only consumer prices but also changes in housing prices and rents," Lee Chang-yong told reporters last Thursday. "Given that more than half of the population lives in the capital region, fluctuations in real estate and rental prices will continue to have a significant impact on overall inflation."

The inflation data for South Korea released on Tuesday will undoubtedly be welcomed by policymakers—once the pressure from rising housing prices and household debt significantly eases, they are eager to support economic growth through accommodative policies.

A last-minute trade agreement reached between the South Korean government and Washington in late July helped the South Korean government lock in its goods tariff rate at 15%, lower than the 25% previously threatened by Trump, but still poses a new significant burden on South Korean businesses compared to a year ago.

"Looking ahead, as telecommunications factors gradually fade, the CPI in September may slightly rise above the Bank of Korea's long-term target of 2%. Given that inflation anchoring is fundamentally stable and domestic demand is weakening, once concerns about the real estate market ease, the Bank of Korea should regain the space to restore accommodative policies," said Kwon Hyo-chong, a senior economist at Bloomberg Economics.

Some economists expect the Bank of Korea to resume its accommodative monetary policy cycle by lowering borrowing costs at its next monetary policy meeting on October 23.

Although the latest inflation data released on Tuesday showed a significant decline, it still highlighted price pressures affecting the daily needs of the South Korean public. In August, prices for food and non-alcoholic beverages rose by 4.9% year-on-year, while food and accommodation prices unexpectedly increased by 3.1%. Education prices rose by 2.4%, and costs for housing, water, electricity, and fuel also increased by 1.3%