South Korea July Producer Inflation Hits 10-Year High

South Korea's annual producer inflation climbed to a fresh 10-year high in July, suggesting consumer prices may rise further, but analysts said a peak could be nearing with falling oil prices.

Korea, Korean Flag
Korea, Korean Flag

The central bank data released on Friday showed the producer price index in July stood 12.5 percent higher than a year earlier, the strongest annual gain since July 1998, led by a surge in oil- and commodities-related products.

This means consumer inflation, which hit a near 10-year high of 5.9 percent in July, could quicken further, although sliding oil prices on softening global demand could lower the outlook for inflation longer term, analysts said.

"The data supports our view that consumer inflation will probably rise further to mid-6 percent range at least until September, but it's hardly unexpected," said Park Sang-hyun, chief economist at CJ Investment & Securities.

Finance Minister Kang Man-soo also said during a scheduled meeting of senior government officials over inflation that consumer price growth would remain high at least until September because of a lag effect from earlier rises in oil prices.

The Bank of Korea figures came a day after the central bank raised the benchmark interest rate by a quarter of a percentage point to a 7-1/2-year high of 5.25 percent, as largely expected, and said it would keep its priority on checking inflation.

But bond investors -- as they did on Thursday -- played down the chances of an additional monetary tightening soon, betting the faltering domestic demand in Asia's fourth-largest economy would persuade the central bank to hold fire.

September treasury bond futures fell 10 ticks to 106.05, little changed from earlier levels. Domestic bond prices had gained on Thursday even after remarks by the central bank governor that inflation would remain high.

U.S. crude oil futures have fallen nearly 20 percent in just a month since peaking at $147.27 a barrel in early July, after having jumped more than 50 percent this year.

U.S. crude prices are now up about 66 percent over the same year-earlier period, easing from more than 100 percent growth seen as recently as in early July.

South Korea's economy expanded a faster-than-expected 0.8 percent in the second quarter from the January-March period, but the outlook remains bleak due to slowing domestic demand just as the global economy is weakening.

Thursday's rate increase marked the first tightening in a year but the eighth in a row since late 2005, indicating the Bank of Korea has already been moving in a pre-emptive manner.

The central bank next reviews rates on Sept. 11.