South Korea’s December 2025 CPI: Deflationary Signals Amid Mixed Macro Backdrop
South Korea’s December CPI contracted by 0.20% MoM, missing the -0.30% estimate but reversing November’s 0.30% rise. Core inflation remains subdued, reflecting easing price pressures. Monetary policy remains cautious amid external uncertainties and fiscal consolidation. Financial markets showed muted reaction, while geopolitical risks and structural shifts continue to shape the outlook.
Table of Contents
South Korea’s Consumer Price Index (CPI) for December 2025 recorded a -0.20% month-on-month (MoM) decline, according to the latest release from the Sigmanomics database. This reading fell short of the -0.30% consensus estimate but reversed the 0.30% increase observed in November. Year-on-year (YoY) inflation remains modest, reflecting a cooling price environment after a volatile 2025.
Drivers this month
- Energy prices eased, contributing -0.12 percentage points (pp) to the CPI decline.
- Food inflation remained flat, neutralizing prior upward pressure.
- Services inflation edged up slightly, adding 0.05 pp, driven by shelter and transportation.
Policy pulse
The Bank of Korea’s inflation target of 2% remains out of reach, with core inflation hovering near 1.10%. The subdued CPI print supports a cautious monetary stance, with no immediate rate hikes expected. Inflation expectations have moderated, aligning with the central bank’s gradual normalization path.
Market lens
Immediate reaction: The KRW/USD pair weakened marginally by 0.10% post-release, while 2-year government bond yields dipped 3 basis points. Breakeven inflation rates edged lower, signaling tempered inflation expectations among investors.
The December CPI figure fits into a broader macroeconomic context marked by slowing domestic demand and external headwinds. The Sigmanomics database shows that the 12-month average monthly CPI change stands at 0.30%, underscoring the recent softness. Core macro indicators reveal mixed signals:
Monetary Policy & Financial Conditions
The Bank of Korea has maintained its policy rate at 3.50% since October, balancing inflation control with growth support. Financial conditions remain moderately tight, with credit growth slowing to 4.20% YoY in November, down from 5.10% six months ago.
Fiscal Policy & Government Budget
Fiscal consolidation efforts continue, with the government targeting a deficit reduction to 2.30% of GDP in 2025 from 2.80% in 2024. Public spending on social welfare and infrastructure remains prioritized, but overall budget discipline limits stimulus scope.
External Shocks & Geopolitical Risks
Global trade tensions and supply chain disruptions persist, particularly with China and the US. The geopolitical environment remains fragile, with North Korean missile tests adding uncertainty. These factors weigh on export growth, which slowed to 1.80% YoY in November.
Drivers this month
- Energy prices: -1.50% MoM, largest monthly drop in six months.
- Food prices: flat MoM, after a 0.40% rise in November.
- Services inflation: 0.20% MoM, driven by shelter and transport.
This chart highlights a clear trend of easing headline inflation, reversing a brief uptick in late 2025. The moderation in energy prices is a key factor, while core inflation’s stability suggests that inflationary pressures remain manageable but watchful.
Market lens
Immediate reaction: KRW/USD depreciated slightly by 0.10%, reflecting cautious sentiment. The 2-year government bond yield fell by 3 basis points, indicating a modest flight to safety. Inflation breakeven rates declined by 5 basis points, signaling reduced inflation expectations.
Looking ahead, South Korea’s inflation trajectory faces a mix of upside and downside risks. The baseline scenario projects CPI growth stabilizing around 1.20% YoY through Q1 2026, supported by moderate domestic demand and stable energy prices.
Bullish scenario (20% probability)
- Stronger-than-expected global demand lifts exports and domestic prices.
- Energy prices rebound, pushing headline inflation above 2% YoY.
- Monetary policy remains accommodative, supporting growth.
Base scenario (60% probability)
- Gradual easing of inflation pressures with CPI around 1.20% YoY.
- Monetary policy steady, with cautious rate adjustments if needed.
- Fiscal consolidation continues, limiting stimulus impact.
Bearish scenario (20% probability)
- External shocks worsen, including geopolitical tensions and supply chain disruptions.
- Deflationary pressures intensify, with CPI falling below 1% YoY.
- Monetary policy may ease to counteract growth slowdown.
Policy pulse
The Bank of Korea is likely to maintain a data-dependent approach, balancing inflation risks against growth concerns. Any sustained deflationary signals could prompt rate cuts, while inflation surprises may trigger tightening.
South Korea’s December 2025 CPI print signals a cautious macroeconomic environment with subdued inflation pressures. The interplay of easing energy costs, stable core inflation, and external uncertainties frames a complex outlook for policymakers. Financial markets remain watchful but steady, reflecting confidence in gradual normalization. Structural trends such as demographic shifts and technological adoption will continue to influence inflation dynamics over the medium term.
Market lens
Investors should monitor inflation breakevens and currency movements closely, as these will provide early signals of shifting inflation expectations. The KRW’s sensitivity to external shocks remains a key risk factor.
Key Markets Likely to React to CPI
South Korea’s CPI data typically influences currency, bond, and equity markets sensitive to inflation and monetary policy shifts. The following tradable symbols historically track inflation trends and monetary policy expectations in KR:
- KRWUSD: The Korean won to US dollar pair reacts to inflation data via monetary policy expectations and external trade flows.
- KOSPI: South Korea’s benchmark equity index, sensitive to economic growth and inflation outlook.
- 005930.KS: Samsung Electronics, a major export-driven stock, impacted by inflation and currency fluctuations.
- BTCUSD: Bitcoin, often viewed as an inflation hedge, reacts to macroeconomic uncertainty and inflation trends.
- USDKRW: The inverse of KRWUSD, also sensitive to inflation and monetary policy.
Insight: CPI vs. KRWUSD Since 2020
Since 2020, South Korea’s CPI and the KRWUSD exchange rate have shown a moderate inverse correlation. Periods of rising inflation often coincide with KRW appreciation due to tighter monetary policy expectations. For example, the 2021 inflation surge saw KRWUSD decline by 4%, while the recent easing of CPI in late 2025 correlates with a 1.50% KRW depreciation. This dynamic underscores the currency’s sensitivity to inflation data and central bank guidance.
FAQ
- What does South Korea’s December 2025 CPI indicate about inflation trends?
- The December CPI of -0.20% MoM suggests easing inflation pressures, reversing November’s rise and signaling subdued price growth in the near term.
- How does the CPI affect South Korea’s monetary policy outlook?
- Subdued CPI readings support a cautious monetary stance, with the Bank of Korea likely to hold rates steady unless inflation deviates significantly from the 2% target.
- Why is the CPI important for investors in KR-related markets?
- CPI data influences expectations for interest rates, currency strength, and corporate earnings, impacting equities, bonds, and forex markets linked to South Korea.
Takeaway: South Korea’s December CPI signals a pause in inflation momentum, reinforcing a cautious macro stance amid external risks and structural shifts.
KRWUSD – Korean won to US dollar exchange rate, sensitive to inflation and monetary policy.
KOSPI – South Korea’s main equity index, tracks economic and inflation trends.
005930.KS – Samsung Electronics, impacted by currency and inflation shifts.
BTCUSD – Bitcoin, often viewed as an inflation hedge.
USDKRW – Inverse of KRWUSD, also reacts to inflation data.
December’s CPI print of -0.20% MoM contrasts with November’s 0.30% and the 12-month average of 0.30%, indicating a reversal in inflation momentum. The YoY CPI growth rate has decelerated from 2.10% in October to approximately 1.40% in December, reflecting easing price pressures across key sectors.
Energy and food prices were the primary drivers of the monthly decline, with energy costs falling 1.50% MoM, the largest drop since June 2025. Meanwhile, core inflation excluding food and energy remained steady at 1.10% YoY, signaling persistent but contained underlying inflation.