Inflation in South Korea jumped to a four-month high of 1.9% in December after rising to 1.5% in November from 1.3% in October, coming in above the consensus call of a 1.7% rise, but it still remains just under the Bank of Korea's 2% target. The bank's previously restrictive monetary policy stance had helped pushed the annual inflation rate down to 2.0% in August from 2.6% in July and 3.2% recorded in December 2023.

The higher pace of y/y increase in the consumer price index at the end of the year was led by transport (+1.3% vs. -0.2% a year before), which accounts for 11.1% of the index. It was partially offset by slower gains in the costs for housing and utilities (+1.7% vs. +2.8%), the category that has the heaviest 17.2% weighting in the total CPI, as well the prices for food stuffs (+2.5% vs. +6.2%), which has a 14.2% share in the index.

The core CPI reading, which excludes volatile factors of food and energy, has been anchored around the bank's target, rising 1.8% on year in December, little changed from the recent gains of 1.9% in November, 1.8% in October and +2.0% in September.

At its latest meeting on Nov. 28, the Bank of Korea unexpectedly cut its policy interest rate by 25 basis points to 3.00% from 3.25%. Amid cooling inflation, the BOK had already lowered the rate by 25 basis points to 3.25% in October after having left it at a restrictive level of 3.50% for 13th consecutive meetings.

For the whole of 2024, overall consumer prices rose 2.3% on year, easing substantially from increases of 3.6% in 2023 and 5.1% in 2022.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Annual changes in the CPI represent the rate of inflation.

An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from mortgages and auto loans to government securities. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.