South Korea’s headline inflation in July gained 1.5 percent as scorching heat wave on top of jump in oil import cost from higher international prices and cheaper Korean won sent up prices of fuel and fresh food despite worsening consumer and business sentiment.

According to Statistics Korea on Wednesday, the country’s consumer price index (CPI) in July rose 1.5 percent from a year earlier, staying below the 2.0 percent target range for 10 months in a row.

The central bank, looking alarmingly at the widening interest rate gap with the U.S. which has been accelerating monetary tightening out of fears of overheating, is stuck in a policy dilemma as job and demand conditions deteriorate at home amid an unfavorable external trade environment.

Korea’s policy rate has stayed at 1.5 percent since last November. The rate gap with the U.S. has further widened as the Federal Reserve in June raised its target range to 1.75 percent to 2.0 percent. The Fed is widely expected to stand pat after its two-day policy meeting on Wednesday but is likely to carry out another two hikes this year, a move that could trigger massive capital outflows in Korea.

The benchmark three-year government bond yield closed Wednesday 0.1 basis point higher at 2.124 percent and the five-year bond 1.5 basis points higher at 2.375 percent.

Prices of petroleum products jumped 12.5 percent on year amid continued upward movement in oil prices, pushing up the headline index by 0.54 percentage point. Gasoline prices leaped 11.8 percent and diesel 14.6 percent, with diesel rising at its fastest pace since March 2017. Public transit fees also rose 4.7 percent as a result.

Individual service fees gained 2.2 percent on year, lifting the CPI by 0.72 percentage point. Cost of dining out rose 2.7 percent and other services 1.9 percent as hospitality sector pushed up prices due to rise in minimum wage.

Prices of agricultural products rose 4.2 percent on year as the peninsula sizzles under the heat dome. Vegetable prices gained 3.7 percent on month but fell 1 percent from a year ago.

Seoul’s temperature hit an all-time high of 39 degrees Celsius (102.2 degrees Fahrenheit) on Wednesday. The record summer heat wave is set to continue for the coming weeks.

The index for everyday expenses reflecting spending for staple food and utility fees grew 1.5 percent on year, up 0.1 percentage point from the previous month.

Core inflation, which excludes volatile oil and farm produces, rose 1.1 percent on year, down 0.1 percentage point on month. The CPI without food and energy, the standard by the Organization for Economic Cooperation and Development (OECD), rose 1.0 percent on year, down 0.2 percentage point on month.

By Lee Yu-sup and Kim Hyo-jin

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]