High oil prices continue to ferment, South Korea's April inflation accelerated to 2.6%.

South Korea's Consumer Price Index (CPI) has risen at its fastest pace since July 2024, as the significant increase in energy prices has enhanced the transmission effect on its domestic economy. Data released by South Korea's Statistics Office on Wednesday showed that the CPI rose by 2.6% year-on-year in April, higher than the 2.2% in March. This figure aligns with economists' median estimate of 2.6%. After excluding volatile food and energy prices, core inflation increased by 2.2% year-on-year, indicating that despite continuing external cost impacts, South Korea's potential price pressures remain overall manageable. The inflation rate is higher than the Bank of Korea's 2% target level. The strong inflation data highlights the increasing impact of the escalating conflict in the Middle East. South Korea's import prices rose by approximately 16% in March, marking the fastest growth in nearly 30 years and suggesting that the sustained high oil prices and weak currency are gradually affecting domestic prices. With little progress in US-Iran negotiations, concerns arise that the Strait of Hormuz may remain closed, resulting in oil prices surging by over 25% in the past two weeks. Before the outbreak of the Middle East conflict, the Strait of Hormuz was a transportation route for approximately one-fifth of the world's crude oil. In this context, inflation expectations have strengthened. The index tracking price level expectations for the next year has risen to its highest level since early 2023, and expectations for the next year's inflation rate have also increased, indicating lingering concerns among households. In April, transportation prices increased by 9.7% compared to the same period last year, food and accommodation prices rose by 2.6%, housing and utility costs increased by 1.7%, and household goods and services prices increased by 1.9%. More broadly, consumer price increases remain moderate, with communication costs rising by 0.6% and food and non-alcoholic beverage prices rising by 0.3%. The Bank of Korea faces pressure to raise interest rates. Economist Jeeho Yoon from BNP Paribas in Paris said, "While oil prices have significantly pushed up inflation, the rise in group tour costs and international airfare prices is driving up service industry price pressures. We believe the Bank of Korea may significantly revise inflation expectations to reflect the impact of the Middle East situation; a rate hike is more likely to occur in the second half of the year rather than in May." BNP Paribas has raised its annual inflation forecast for South Korea from 2.2% to 2.5% and noted high uncertainty in the outlook, depending on the development of the Iran conflict. The data released on Wednesday further complicates the situation for the South Korean economy, potentially putting greater pressure on the Bank of Korea to consider tightening policies. Strong semiconductor exports continue to support economic growth, driving a 1.7% increase in GDP in the first quarter. The new Bank of Korea Governor, Shin Hyeon-song, warned that rising oil prices and the depreciation of the South Korean won could push up inflation. However, Shin Hyeon-song also cautioned that rising prices amid somewhat weak domestic demand in South Korea could pressure economic growth. Since July last year, the Bank of Korea has maintained its benchmark interest rate at 2.5%, seeking a balance between inflation risks and economic growth and financial stability. In its latest monetary policy meeting in April, the Bank of Korea emphasized a data-dependent decision-making approach. According to reports, Yoo Sang-dae, Senior Deputy Governor of the Bank of Korea, stated on Monday that considering the faster-than-expected pace of price increases, it is time for the Bank of Korea to consider raising interest rates. Yoo Sang-dae indicated that the Bank may "possibly" hint at the need for a rate hike at the rate decision meeting on May 28 or later in the year.