Inflation stabilizes in February

Latest reading: Consumer prices rose 2.0% in annual terms in February, stable from the prior month's reading and below market expectations. Relative to the previous month's data, price pressures were higher for recreation and culture in February (+3.0% in annual terms vs +0.9% in January). In contrast, there were reduced price pressures for housing and utilities (+1.2% vs +1.3% in January), food and non-alcoholic beverages (+2.1% vs +2.9% in January) and clothing and footwear (+2.1% vs +2.4% in January). Finally, the change in transportation prices was the same as in the prior month (+1.1% in February and January). Meanwhile, core consumer prices were up 2.3% in annual terms in February, following a 2.0% increase in the prior month. Finally, consumer prices rose 0.31% in February on a month-on-month basis, following a 0.39% increase in the prior month.

Outlook: Our panelists expect inflation to remain broadly in line with the Central Bank’s 2.0% inflation target in 2026 as a whole. That said, the evolution of the U.S.-Iran conflict is key to monitor. South Korea imports roughly 70% of its oil and about 14% of its natural gas from the Middle East, so a prolonged closure of the Strait of Hormuz is an upside risk. That said, the government recently announced that it will cap energy prices for the first time in 30 years.

Panelist insight: Commenting on the outlook, Nomura’s Jeong Woo Park stated: “There have been some concerns that supply-side pressures would lead to a more broad-based increase in domestic prices, and so drive a more hawkish monetary policy. We disagree. While Middle East tensions and the weak KRW will likely remain a potential threat to headline inflation, we expect underlying inflation dynamics to remain unchanged, with sticky service prices and volatile energy and food prices driving inflation dynamics. More importantly, the government is stepping up its efforts to limit the increase in retail gasoline prices, and ensure that energy supplies remain adequate, including the strategic oil reserve, which can help limit oil pass-through to domestic retail prices. As a result, we expect inflation to remain around the BOK’s 2026 inflation forecast of 2.2%, though in the near term an overshoot is likely.”

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