Increased labour market slack in S.Korea likely to limit service inflation

South Korean service inflation have posted a steady growth since early 2014 as it grew from 1.1 percent to 2.3 percent, with all the components in service inflation increasing over the last two years. The growth in personal service inflation, both restaurant and non-restaurant, is seen driven by tightening of the labor market with a lag. The growth in public service inflation in mid-2015 was mainly due to an increase in public transportation fares, as the government officials thought that the period of low headline inflation was a good opportunity to reduce the deficit on public transportation.

The unemployment rate had been firm at a low level of around 3 percent in 2012 and 2013, however, it picked up in 2014 and remained at the moderate level of 3.5~4.0 percent. With the current usual time lag between the labour market and wage inflation, the increased labour market slack is expected to affect service inflation.

"Though service inflation is currently at the highest level since early 2012, we now expect that its upside will be limited by the rising slack in the labour market" - Societe Generale.