July 4, 2017 / 12:12 AM / 6 months ago

South Korea June inflation eases, but stays near central bank target

SEOUL (Reuters) - Consumer inflation in South Korea eased slightly in June partly as tourism costs dropped due to a ban on Chinese tour groups by Beijing and on falling utility rates, but the overall price impulse suggested a steady improvement in consumption and broad economic growth.

The consumer price index rose 1.9 percent in June from a year earlier, data showed on Tuesday, down from the 2 percent increase in May, and lagging the 2.0 percent forecast in a Reuters poll.

Asia’s fourth largest economy grew at its quickest pace in six quarters in January-March period, thanks to robust construction sector activity and exports. Moderate price pressure near the Bank of Korea’s target of 2 percent since early this year suggested private consumption is steadily improving.

“Agricultural product prices have been volatile, but gains in service costs have been sustaining the overall price pressure,” Park Jung-woo, an economist at Korea Investment and Securities said.

Tuesday’s data showed the costs for electricity, gas and tap water declined 1.6 percent on-year. That was partly offset by inflation from fresh food products, which stood at 10.5 percent in June, reflecting rapidly rising egg prices sparked by an outbreak of avian influenza.

Service costs gained 1.9 percent in June from a year earlier, though package tourism costs tumbled 9.1 percent from a year earlier.

“The overall service costs are holding up but group tour costs are dropping in Korea as fewer and fewer number of inbound Chinese tourists are squeezing local travel agencies. The impact from the Thaad is still here,” an official from the Statistics Korea said.

The number of inbound Chinese tourists dropped 34.7 percent through January to May this year from the same period in 2016 after China banned group tours to South Korea, data from the Korea Tourism Organization shows.

China has launched a series of boycotts against South Korean businesses after Seoul decided to deploy of a U.S. missile defence system, or the Terminal High Altitude Area Defense (THAAD), out of fear its powerful radar could see deep into Chinese territory.

“Inflation is expected hover around 2 percent throughout this year, and won’t accelerate much further to a level that calls for a change in monetary policies,” Park said, adding that he believes the Bank of Korea to keep the base rate at a record-low 1.25 percent for the time being.

Core inflation, which strips out volatile food and fuel prices, was up 1.4 percent on-year, after similar growth in May.

Reporting by Cynthia Kim; Additional reporting by Dahee Kim; Editing by Shri Navaratnam

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