South Korea’s August consumer price index (CPI) rose by 1.7% year-on-year, lower than the expected 2.0% rise from the Reuters poll. The month-on-month CPI decreased by 0.1%, opposing the predicted 0.2% increase.
Core CPI, excluding food and energy, increased by 1.3% year-on-year, which is less than July’s 2.0% and the slowest rise since August 2021. The weaker CPI data is primarily due to a 13.3% drop in telecommunication prices.
Impact of SK Telecom Discount
This decrease is attributed to SK Telecom’s 50% discount on monthly subscription fees, affecting 24 million customers following a data leak. This brought the headline CPI to a nine-month low, showing a lowered impact of telecommunication costs on the index.
The August inflation data came in much softer than we anticipated, creating a new dynamic for the Bank of Korea’s policy. This unexpected slowdown, with the headline CPI at a nine-month low, immediately lowers the pressure for any further interest rate hikes. We must now seriously consider the possibility of a policy pivot from the central bank sooner than previously expected.
However, we need to be cautious as a significant part of this drop was due to a one-time 13.3% cut in telecommunication prices. This was a result of a major data leak at a single company, which is not a reflection of broad economic weakness. The Bank of Korea will likely look past this specific factor, focusing more on the core inflation reading, which also slowed.
Disinflationary Signals
This disinflationary signal is amplified by other recent data showing a slowdown in the economy. We’ve seen South Korean exports, a key engine of growth, contract by 2.8% in August 2025, which marks the third consecutive monthly decline. Looking back, we saw a similar situation in early 2024 when weakening global demand led the BOK to pause its tightening cycle despite inflation being above target.
Given this, we should position for lower Korean interest rates in the coming weeks. We believe receiving fixed on 2-year Korean Won interest rate swaps (IRS) is an attractive trade, as the market will start pricing in a higher probability of a rate cut by year-end. This position profits if rates fall or if expectations for future rates decrease.
The prospect of lower rates should also weigh on the Korean Won. We anticipate the USD/KRW exchange rate will climb from its current level of around 1,380. Buying USD/KRW call options with a three-month expiry provides a defined-risk way to profit from a potential depreciation of the won.
This environment could be supportive for South Korean equities, as lower borrowing costs help corporations. We see potential for the KOSPI 200 index to break through recent resistance. We can express this view by purchasing out-of-the-money call options on the index, offering a cheap way to gain upside exposure.
