S. Korea's Inflation Expected to Remain at 1% Low in 2017

South Korea's consumer prices are expected to remain at a low 1% range next year due mainly to a slowdown in the world economy and a modest rise in oil prices, coupled with contracted domestic demand, a state-run think tank said Tuesday. 
"Korea's inflation is projected to mark a 1.1-1.4% rise in 2017, implying that the probability of achieving the inflation target (of 2%) is low," the Korea Development Institute (KDI) said in a report. 
"Oil prices are expected to rise gradually. However, the weakening of external and internal demand, resulting from the recent stagnation in the domestic economy and a global economy exposed to downside risks from the political uncertainties in the US, among others, will most likely limit any gains in Korea's inflation," it said. 
South Korea's consumer price index has been hovering below the 1% level for years, raising concerns over deflation in Asia's fourth largest economy. 
For the first 11 months of 2016, the country's inflation rose an average 0.9%, slightly up from a 0.7% rise in 2015, far below the 2% inflation target set by the Bank of Korea. 
The average inflation stood at 1.3% in the 2012-2016 period, with the corresponding 2000-2011 figure hitting 3.2%, South Korea's News Agency (Yonhap) reported. 
The KDI report noted that the low inflation trend is largely driven by sluggish global demand and low oil prices, considering that South Korea is a mid-sized open market that imports nearly all of its crude oil consumption. 
International oil prices fell 50% and 20% in 2015 and 2016, respectively, causing consumer prices in South Korea to drop by 1%, it added. 
"The ongoing disinflation since 2015 is mainly due to the changes in external factors," said the state-run think tank. "On the other hand, domestic aggregate demand pressure shocks have had a relatively small impact on consumer prices: a trend that has been observed in the post-global financial crisis." The think tank suggested that the central bank take a more expansionary stance to ease such external downside pressures to achieve the 2% inflation target in the face of a possible US rate hike. 
"To tackle the prolonged period of low inflation, the monetary authorities should implement active measures to increase inflation according to inflationary prospects and economic changes," it said.