BOK’s AI model puts inflation at 2% by September

[Photo by MK DB]

South Korea’s consumer price inflation rate is expected to drop towards the target of 2 percent by September 2024, according to the latest forecast by the Bank of Korea (BOK).

The BOK noted in a report released Monday that the short-term inflation rate, which climbed to 2.6 percent in July, is projected to slow to the low 2 percent range in August and then hover around 2 percent in September. The core inflation rate is also expected to stabilize within the low 2 percent range during the same period.

The forecast is based on a model developed by the BOK that uses a combination of machine learning techniques and bottom-up estimation to enhance short-term inflation predictions. The model forecasts the overall consumer price inflation rate by predicting price changes in specific categories within the consumer price index and then weighting these predictions.

By category, agricultural product prices are expected to moderate thanks to favorable weather conditions while the rise in petroleum product prices is projected to slow, reflecting a recent decline in international oil prices.

The BOK also highlighted the impact of the sharp increase in oil and agricultural product prices in 2023, noting that this base effect would significantly influence the figures. The inflation rate for petroleum products is expected to decrease to a negative 3.6 percent in September 2024 from 8.4 percent in July year-on-year. For agricultural, livestock, and fishery products, the rate is forecasted to drop to 3.7 percent from 5.5 percent over the same period.

“Considering the significantly high inflation rate in the second half of last year, there is a possibility that inflation could drop to the 1 percent range,” the Korea Development Institute (KDI)’s Kim Mee-roo said.

Experts are urging the central bank to pivot its monetary policy to support domestic demand as the trend of slowing inflation becomes evident. “Given that the primary goal of the BOK’s monetary policy is price stabilization and that it takes nearly three quarters for the effects of a rate cut to materialize, it would be prudent to expedite the rate cut,” Kim added, while expressing doubts about the effectiveness of monetary policy as a tool for curbing household debt.