South Korea’s Inflation Slows Sharply, Raising Hopes for Policy Shift

South Korea's consumer inflation cooled noticeably in August, adding momentum to expectations that the Bank of Korea (BOK) may soon gain room to adjust its monetary stance.

According to Statistics Korea, the consumer price index (CPI) rose 2.2% year-on-year in August, down from 2.6% in July. It was the lowest reading since November 2024 and moved closer to the BOK's 2% target. The release, published earlier this month, has been closely watched in financial circles as a signal of easing price pressures.

Economists note that softer energy and food costs were the main drivers, while core inflation-excluding volatile items-remained firmer. The slowdown nonetheless suggests that the wave of high inflation which followed the pandemic and energy shocks is continuing to recede.

Markets have reacted with cautious optimism. The Korean won strengthened slightly against the U.S. dollar after the data, while Seoul's KOSPI index registered modest gains. Analysts say the numbers could allow the BOK to consider a rate cut later this year, though officials remain wary of external risks such as oil price swings and U.S. Federal Reserve policy.

Overseas funds have been gradually increasing their exposure to Korean equities, with analysts noting that the latest inflation slowdown has reinforced confidence in the market's outlook. "Stability in consumer prices helps anchor expectations and reduces policy uncertainty," said a strategist at a Hong Kong-based investment firm. "That tends to make Korea's assets more attractive relative to peers."

At the household level, the latest figures provide some relief. Consumer surveys suggest that families are beginning to feel less pressure from food and utility bills, although broader spending patterns remain uneven. Economists argue that any revival in domestic demand will be crucial to balancing Korea's export-driven economy in the second half of the year.

Looking ahead, much will depend on how global conditions evolve. Should inflation continue to trend downward, the Bank of Korea may join a growing number of Asian central banks considering policy easing. For now, Seoul's ability to maintain price stability without undermining growth will be a key test watched by both markets and policymakers abroad.