SEOUL (BLOOMBERG) – South Korea’s consumer prices fell for the first time in September, underscoring the hit to domestic demand as the economy grapples with falling exports.
Prices dropped 0.4 per cent from a year earlier, according to the country’s statistical office on Tuesday (Oct 1). Inflation was flat in August and economists surveyed by Bloomberg had forecast a 0.3 per cent fall for September.
South Korea’s economy is expected to grow at the slowest pace since the global financial crisis this year, as the U.S.-China trade war and a slowdown in Chinese economy hurt overseas demand for Korean goods.
Bank of Korea Governor Lee Ju-yeol said last week that downside risks are making it hard for the central bank to maintain its 2.2 per cent growth projection for this year. Economists surveyed by Bloomberg forecast a 1.95 per cent economic expansion.
Negative inflation is likely to add fuel to a growing debate over whether the risk of deflation is imminent in South Korea and what policy action needs to be taken.
BOK Governor Lee last week dismissed concerns of deflation as “excessive.” Still the latest indicator adds to pressure on the central bank to cut interest rates as the economy muddles through an array of downside risks.
Consumer prices have stayed well below the BOK’s target of 2 per cent this year, and inflation expectations among households have also been on a downward track.
South Korea’s aging population and falling potential growth are two challenges that raise the risk of structural deflation in the long term.