Korea's inflation pegged to ease to 1.8%

Thankfully, food prices have fallen.

According to DBS, headline CPI inflation is expected to ease to 1.8% YoY from 2.1% in the previous month.

Here's more from DBS:

Food prices have fallen from the peak levels set in September, due to the dissipation of typhoon impact and festival effects. As of October, food prices remained about 1.8% higher than the normal levels prior to the September surge.

There remains some scope for food prices to recede further.

The underlying price pressures in the domestic economy remain tame currently, reflecting the slowdown in aggregate demand over the past two quarters.

According to the latest consumer confidence survey conducted in November, consumers’ expectation about price level in the next six months has fallen further by 2 points, reaching the lowest level over more than three years.

Inflation expectation for the next 12 months has also dropped to the lowest seen since two years ago in Nov10.

Moreover, the won’s appreciation can help to contain inflation and inflation expectations, slowing the rise in import prices of oil and other raw materials.

The won gained 4.8% against the dollar between July and November, which largely offset the 6.2% rise in the USD-denominated crude oil prices (Brent) over the same period.

Notably, the won appreciated strongly against the yen this month, by 3.9% MoM. The rise in KRW/JPY rate should help reduce import costs for Korea’s importers and consumers, given that Japan is Korea’s second largest import market that accounts for 15% of its total imports.

We expect CPI inflation to remain stable at low-2% in the near term, before rising to cross 2.5% starting from 2Q 2013. With inflation comfortably at the lower end of the central bank’s target band (2.5-3.5% for 2013-2015), the BOK will be allowed to keep policy accommodative for another few quarters. We expect policy rate to stay unchanged at 2.75% in 4Q12-3Q13.