By Jihye Lee


South Korea is likely to see elevated inflation for a prolonged period as higher energy costs spread into the broader economy and creates fresh risks for policymakers, the Bank of Korea said.

Even though markets are cheering a potential truce between the U.S. and Iran and an expected normalization of shipping through the Strait of Hormuz, the central bank doesn't expect price pressures to ease quickly.

"Petroleum-product prices are expected to gradually decline as wartime conditions ease, but cost-driven price pressures caused by high oil prices and a weak won are expected to gradually spread to items beyond petroleum products," it said in a Wednesday report.

The central bank said consumer inflation accelerated in the first half of the year following a surge in global oil prices that lifted fuel costs. Headline inflation reached 3.1% in May, the highest since March 2024, creating more headwinds for policymakers who are also grappling with a weakening currency.

The Bank of Korea expects inflation to remain around 3% in the second half of the year, with core inflation staying in the mid-to-high 2% range.

Drawing lessons from the surge in inflation following Russia's invasion of Ukraine in 2022, the BOK said energy shocks typically begin affecting non-energy goods and services for about six months after the oil prices rise and can continue for roughly a year.

The central bank also pointed to wage growth, particularly in the semiconductor sector, as a potential source of further inflation pressure.

Major South Korean chipmakers have awarded unusually large bonuses and pay increases amid an AI-driven boom that has boosted profits and intensified competition for talent.

"Should wage increases spread beyond the semiconductor industry to other sectors of the economy, upward pressure on inflation could intensify further through both higher production costs and stronger consumer demand," the central bank said.

"Even if the Middle East conflict ends and oil prices gradually decline, factors such as stronger consumption and rising wages could continue to fuel inflation."


Write to Jihye Lee at jihye.lee@wsj.com


(END) Dow Jones Newswires

06-17-26 0253ET