Korea inflation rockets for four straight months

Price hikes edged inflation higher to 2.73% yoy in July compared from June's 2.56%.

According to OSK DMG, headline inflation edged higher to 2.73% yoy in Jul from Jun’s 2.56%, marking the fourth straight month that prices have accelerated in the kingdom. Less worrisome was core inflation, which stayed below 2.0% for the third consecutive month, rising by 1.87% yoy vs. 1.92% in Jun.

Here's more from OSK DMG:

Market had been expecting headline and core inflation to come in at 2.60% and 1.95% respectively, while we had anticipated a rise of 2.71% and 1.93% respectively. A breakdown of the CPI basket showed that food prices, which account for a third of the basket, accelerating by 5.42% yoy in Jul from 4.72% in Jun. Transport cost (second largest component) fell 0.14% yoy in Jul, though this was an uptick from Jun’s -0.48%. Housing cost - the third largest component in the basket – rose by a more moderate 2.56% yoy in Jul as compared to 3.42% in Jun.

The continuing uptick in inflation suggests that the inflation risks to the economy remain. A resurgence in commodity prices, including oil prices, together with the government’s massive pump-priming program, the minimum wage program and the discontinuation of diesel subsidies in Sep could pave the way for higher inflation in the latter part of the year.

However, we do not expect inflation to runaway as these price pressures would likely be mitigated to a certain extent by government measures, including price controls. We expect inflation to average around 3.6% in 2012 as a result. Despite core inflation being well within the central bank’s target, we continue to expect the central bank to hold its key policy rate steady for the rest of the year as we think that the economy does not need any policy support at the moment given that the economy is likely to expand by around 6.0% this year and the upside risks to inflation. Instead, it is likely that the central bank would only unleash any rate cuts if domestic growth is threatened by the deterioration in the global environment.