Government sees annual inflation at around 2.7%, eyes lifting oil price cap if market stabilizes

The government forecast consumer prices will rise around 2.7% for the full year, reflecting upward pressure on global oil prices from the prolonged Middle East conflict. The projection aligns closely with the Bank of Korea's latest inflation outlook.

The government plans to review whether to lift the oil price cap and reverse the fuel tax cut once international oil prices show structural stability.

South Korea's Ministry of Finance and Economy held a ministerial task force meeting on consumer prices Thursday at the Government Seoul Complex, chaired by Deputy Prime Minister and Finance Minister Koo Yun-cheol. Officials discussed the latest consumer price trends and policy responses.

The ministry attributed May's 3.1% consumer price increase — the highest in 26 months — to rising petroleum prices driven by the prolonged Middle East conflict.

However, it said the oil price cap and fuel tax cut had together shaved 0.6 percentage points off inflation. Without those measures, May's consumer price growth would have reached around 3.7%, the ministry estimated.

The government said it would weigh conditions in the Middle East and energy markets before deciding whether to end the oil price cap.

Vice Minister of Finance and Economy Kang Ki-ryong said at an earlier briefing that the government would consider lifting the regime "if the resumption of Hormuz Strait transit eases supply concerns or if international oil prices are judged to have stabilized structurally."

"There is currently a gap between international oil price movements and domestic petroleum prices, and we need to watch how much that gap narrows before we can say at what point or at what price level the cap would be lifted," Kang said. He added that policy questions remain — including whether to lift the cap all at once or gradually, and whether to maintain or reverse the fuel tax cut.

The government plans to issue guidelines setting out the standards and procedures for compensating refiners for losses incurred under the price cap. To that end, it will launch a Maximum Price Settlement Committee — comprising vice ministers from the Ministry of Finance and Economy, the Ministry of Trade, Industry and Energy, and the Ministry of Planning and Budget — this month, and will consult with the refining industry on specific compensation arrangements.

In addition, the government will designate more gas stations that have contributed to price stability as "good gas stations," offering awards and various incentives. To support vulnerable households, it plans to swiftly disburse high oil price victim support funds, diesel subsidies for freight trucks, and fuel-linked subsidies for tax-exempt fuel used by farmers and fishers.

On the inflation outlook, Kang said it was difficult to predict but that prices would hinge on petroleum costs. "If the current stalemate drags on, our working-level assessment is that inflation will likely stay close to the May level," he said.

He noted that the consumer sentiment index, which had eased in March and April, rebounded in May, but said it did not yet appear to be translating into demand-side price pressure. "If consumer sentiment keeps improving, we will watch the demand side with caution as well," he added.

On the annual consumer price forecast to be included in the government's second-half economic growth strategy, due out later this month, Kang said the figure would not stray far from the Bank of Korea's 2.7% projection, given that the cumulative January-to-May reading stands at 2.4%.

To ease price pressures felt by households, the government will expand tariff quota volumes for pork and chicken, and will review whether to introduce emergency second-half tariff quotas this month. It will also increase discount support for agricultural and livestock products, expand imports of fresh eggs from the United States and Thailand, and supply 8,000 tons of stockpiled seafood — including pollock and mackerel — at 30 to 40 percent below market prices.

The government also plans to operate an agricultural and livestock supply stabilization task force from June 15 to get ahead of potential supply disruptions from summer heat waves and heavy rains.