South Korea & Taiwan: Food-driven inflation rebound and policy implications

Inflation rebounds amid higher food prices.
Group Research, Ma Tieying07 Sep 2023
    Photo credit: Unsplash/Adobe Stock Photo

    South Korea and Taiwan both reported higher-than-expected inflation figures this week. In South Korea, headline CPI rose to 3.4% YoY in August, surpassing the 3% threshold for the first time in over three months. This increase was mainly attributed to a 4.9% YoY rise in food prices, driven by recent rainfall and heatwaves. The decline in transportation fees also narrowed to -2.5%, compared to -10.7% in July, owing to the rebound in global oil prices and the diminishing impact of high base effects. Core CPI, excluding food and energy components, remained steady at 3.3%. The resurgence in inflation had been expected by the Bank of Korea, which projected a rebound in inflation from August onwards, with an annual average of 3.5% for the full year. Our full-year inflation forecast closely aligns with the BOK's projection at 3.4%. The August inflation data have largely followed the expected trajectory. Unless there are sustained disruptions affecting food and energy prices from the supply side, we expect inflation to hover around 3% until the end of the year before receding to 2.5% from 1Q24. Accordingly, we maintain our forecast that the BOK will keep its policy rate at 3.50% through the rest of 2023 and then initiate rate cuts in 1Q24. 

    In Taiwan, headline CPI also rebounded notably, reaching 2.5% YoY in August, surpassing the 2% mark for the first time in three months. This increase was primarily driven by a 3.5% YoY rise in food prices, which can be attributed to the agricultural losses caused by recent typhoons. Additionally, transportation fees saw a slightly faster pace of increase at 1.7%, compared to 0.5% in the previous month. In contrast, core inflation remained very stable at 2.6%. During the latest MPC meeting in June, Taiwan’s central bank projected full-year inflation to be at 2.2%, implying a rebound to the low-2% level in 2H23. Our forecast also accounts for this inflation rebound, with a full-year projection of 2.3%. Past experiences suggest that food price surges related to typhoons tend to be temporary, with limited pass-through effects on core CPI items. Given these factors, we are maintaining our full-year inflation forecast at 2.3%. Our view also remains that the central bank will keep monetary policy unchanged through the rest of this year and into 2024.

    Ma Tieying 馬鐵英, CFA

    Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣


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