South Korea’s consumer prices rose 2.2% year-on-year in January, marking the fastest increase in five months, according to Statistics Korea data released Wednesday. Inflation accelerated from 1.9% in December, driven by higher energy costs, a weaker won and base effects from last year. Monthly inflation also climbed 0.7%, with prices rising across all major categories, including services, industrial goods and fresh food.

Petroleum product prices surged 7.3% year-on-year, the steepest increase since July 2024, as recent currency depreciation pushed up import costs. Core inflation, which excludes volatile food and energy prices, rose 1.9%, remaining below 2% for the fourth consecutive month. Prices of daily necessities climbed 2.5%, slightly faster than December’s 2.2% gain. The finance ministry pledged continued vigilance and extended tariff rate quotas on energy and food imports to contain inflationary pressures.

WHY IT MATTERS

The latest inflation surge puts the Bank of Korea (BOK) in a policy bind, as it struggles to balance currency stability and economic stimulus. A 1.5 percentage point gap between U.S. and South Korean interest rates has already weakened the won, raising import costs and fueling inflation. While the BOK is still expected to cut rates this month, the BOK will likely adopt a more cautious approach going forward.

Compounding the problem, South Korea’s economy is already in a fragile state. Morgan Stanley recently slashed the country’s 2025 GDP growth forecast to 1.5%, warning that weak consumer spending and slowing exports will drag down recovery despite last year’s rate cuts. Political uncertainty following President Yoon Suk-yeol’s impeachment has further delayed fiscal stimulus measures, leaving businesses and consumers exposed to external risks.

Moreover, the U.S.-Canada tariff war, which has been put on pause for a month, and Trump’s protectionist stance threaten supply chains and price stability, with potential spillover effects on South Korean manufacturers. If exchange rate volatility persists and external inflationary shocks mount, the government may struggle to maintain economic stability.