Signal A one-point wider output gap raises Korean core inflation by about 0.1 to 0.4 points, Bank of Korea estimates

Summary

The issue analysis quantifies how demand pressure feeds into core inflation, using econometric methods such as asymmetric Phillips curves and local projection models. It estimates that a 1 percentage point increase in the GDP gap could raise core inflation by roughly 0.1 to 0.4 points. If higher gross domestic income from improved terms of trade turns into more consumption, additional upward pressure of about 0.05 to 0.2 points could follow. The size of that extra effect depends on how quickly and how much the added income flows into domestic private consumption. Income that stays in savings or asset purchases instead of reaching consumption would have a correspondingly smaller additional effect on prices.