South Korea’s January inflation decelerates mainly due to tobacco

South Korea's inflation in January was 0.8% y/y, as compared with December's 1.3% and lower than Barclays' forecast of 1% and consensus expectations of 1.1%. The slowdown in headline inflation was mainly due to tobacco, as the impact of 80% increase in cigarette prices administered in January 2015 began to wash out the year-on-year comparison that led to a net reduction of 0.56pp. There was a further drop in gas and gasoline prices in level terms, indicating the renewed decline of international oil prices. However, due to the low base 2015 year, the drop in oil eased on a yearly basis.

Meanwhile, the core inflation was also impacted due to high base effect from increase in cigarette prices that declined to 1.7%. Korea's services sector was stable and added 1.34pp to the headline rate. That said, weak domestic demand is likely to begin spilling over to core inflation and services after the festive season.

"All said, the extended period of lower commodity prices prompted us to lower our 2016 headline inflation 50bp, to 1.3% (BoK: 1.4%). In our view, the still-subdued inflation outlook, along with softening domestic demand and weak activity indicators, will continue to keep the BoK's policy stance accommodative in 2016", says Barclays. 

Food inflation contributed 0.23pp to overall price rise. The underlying growth pace of South Korea is likely to remain weak into early 2016, with cyclical weakness worsened by the effect of weather-induced disruptions to shipments in north Asia and the US.