Korean inflation likely to creep higher in next two years

Korea's inflation accelerated to 1.3% yoy in December which came in above expectations and registered highest recording from August 2014. This firming in headline was supported by food and retail clothing prices.

Along with this a smaller oil pullback on the yearearlier lower base, driven the rise in heaadline rate, the services was another primary inflation driver, which added 1.34pp to the headline.

One more supporting factor was temporary tax rebate designed to stimulate domestic consumption. These stimulus measures with resurgent tourism spending, helped core inflaiton for two months.

"That said, with government incentives expiring on 31 December and the effect of the January 2015 tobacco price hike kicking in next month, we expect core inflation to fall back below 2% in the coming months. All said, today's release brings 2015 full year inflation at 0.7% y/y, in line with our expectation. We expect inflation to creep higher to 1.8% y/y in 2016 and 2.1% in 2017", says Barclays in a research note.