South Korea Inflation Hits 26-Month High on Energy Costs

South Korea's consumer prices rose 3.1% year-on-year in May 2026, marking a 26-month high and exceeding market forecasts. The Bank of Korea has responded to these upside risks by signaling a shift toward a more restrictive monetary policy, with markets now anticipating a base interest rate hike as early as July from the current level of 2.5%.

The surge was primarily driven by a 24.2% jump in petroleum product prices, specifically gasoline and diesel, which rose 23% and 33% respectively. This volatility stems from a war between the United States and Iran that disrupted energy shipments through the Strait of Hormuz. Additionally, international airfares hit a 31-year high after increasing 33.5% due to fuel surcharges. Core inflation, excluding volatile food and energy, reached 2.5%, its highest level since February 2024.

Governor Shin Hyun-song indicated that interest rates may need to be raised to curb inflation and support a weakening won. He noted that strong economic growth provides the leeway necessary to conduct effective monetary policy. The central bank expects inflation to remain at similar levels through June as petroleum prices continue to post elevated rates of increase.