As strong semiconductor exports spread to domestic markets, the Bank of Korea has analyzed that demand-side price pressures could lead to an increase in core inflation. Specifically, if the core inflation rate exceeds the mid-2% range, there is a possibility of widespread price increases across individual items.
In a report titled 'Impact of Demand-Driven Price Pressures on Core Inflation' released on August 30, the Bank of Korea's Price Trends Team projected that domestic core inflation would continue to rise significantly as demand pressures increase.
The Bank noted that since 2000, there have been four instances of 'demand-driven high core inflation' occurring simultaneously with demand-side pressures: before the credit card crisis in 2002, just before the global financial crisis in 2007-2008, during the recovery from the financial crisis in 2011, and during the recovery from the pandemic shock from 2022 to 2024.
During these periods, improvements in household purchasing power led to increased consumption and rising prices. As demand recovered, companies were observed passing on rising costs to prices. Notably, when the core inflation rate exceeds the mid-2% range, the correlation in price increases among individual items becomes significantly stronger.
The effect of demand pressure on raising core inflation is also estimated to be substantial. In a high-demand phase, if the GDP gap increases by one percentage point, the core inflation rate is expected to rise by approximately 0.1 to 0.4 percentage points. The cumulative impact on core inflation following a demand shock could reach up to 0.6 percentage points in a high-demand phase.
Improved trade conditions due to strong semiconductor exports also play a role. The Bank of Korea analyzed that if increased purchasing power from rising real gross domestic income (GDI) leads to expanded consumption, it could create an additional upward pressure of 0.05 to 0.2 percentage points on core inflation. However, if income increases lead to savings or asset acquisition, the price pass-through effect may be limited.
Song Byeong-ho, head of the Price Trends Team at the Bank of Korea, stated, "The current situation shares many similarities with past instances of demand-driven high core inflation." He added, "There were some signs of cost shock transmission in the first half of the year, and we are now seeing demand pressures gradually expanding."
When assessing whether increased income from improved trade conditions translates into consumption, employment and private sector sentiment are crucial, according to Song. He emphasized, "It is important for the warmth of economic improvement to spread across households. For that to happen, employment needs to improve, and the sentiment of private entities must remain positive."
Regarding the phenomenon of strengthened correlation among items when the core inflation rate exceeds the mid-2% range, Jeong Won-seok, deputy head of the Price Trends Team, explained that no specific threshold was predetermined. He noted, "When we plotted the actual data, we observed that the slope of the trend line changed once a certain level was surpassed. As the core inflation rate exceeds a certain level, individual items tend to show similar rates of increase, indicating a stronger correlation in price rises among them."
The Bank of Korea emphasized the need to closely monitor not only the pace and intensity of income growth from improved trade conditions but also the overall economic recovery when assessing future inflation trends. It cautioned against allowing rising core inflation to become entrenched across a wide range of items.
* This article has been translated by AI.
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