The Bank of Korea (BOK) has released an analysis suggesting that as consumption recovers on the back of growth driven by semiconductors, inflation pressure could broadly spread across multiple items.

In a report titled "Issue Analysis: The Impact of Demand-Driven Inflation Pressures on Core Inflation" released today (August 30), the BOK analyzed the characteristics of past periods when demand recovery drove core inflation increases, as well as the impact of expanding demand-side pressures on core inflation.

According to the analysis, since 2000, there have been four periods characterized by significant demand-side pressure and high core inflation rates: before the credit card crisis (Q1 to Q4 2002); right before the global financial crisis (Q2 2007 to Q3 2008); the recovery period following the financial crisis (Q2 to Q4 2011); and the recovery period from the pandemic shock (Q1 2022 to Q1 2024).

These periods shared common traits where wages and asset prices rose significantly, improving household purchasing power and leading to expanded consumption, which in turn pushed up core inflation.

The analysis showed that during such demand-driven inflation periods, price increases tended to spread more widely to a broader range of items.

In particular, when core inflation exceeds 2.5%, price co-movement among individual items strengthens, creating a phenomenon where price hikes in specific items lead to overall inflationary trends across the economy.

In the report, the BOK explained, "When the core inflation rate surpasses a certain level, the tendency for inflation to spread more broadly rather than remaining limited to individual items can be reinforced."

It added, "Recently, personal services that are sensitive to economic conditions and show high co-movement, such as travel, accommodation, and dining, have been leading the rise in core inflation, raising the possibility that inflation may spread more widely compared to the past."

In its revised economic outlook on the 27th, the BOK projected this year's and next year's core inflation rates at 2.5%, higher than its previous May projections of 2.4% and 2.3%, respectively.

The report also analyzed the impact of demand pressure on core inflation through the correlation between core inflation rates and the GDP gap ratio—an indicator showing how much economic demand (actual GDP) exceeds or falls below supply capacity (potential GDP).

The analysis estimated that when the GDP gap ratio expands by 1 percentage point during periods of high demand pressure, the core inflation rate rises by approximately 0.1 to 0.4 percentage points.

In particular, when Gross National Income (GNI) expands due to improvements in the terms of trade, additional upward pressure of approximately 0.05 to 0.2 percentage points on core inflation can occur.

The BOK forecasted, "Looking ahead, domestic core inflation is likely to maintain a high upward trend in the mid-to-upper 2% range for a considerable period as demand-side price pressures gradually spread."

It further noted, "When assessing future inflation trends, we must closely monitor not only the economic recovery but also the speed and intensity with which income growth stemming from improved terms of trade ripples into domestic consumption, ensuring that core inflation increases do not spread widely and become entrenched."