South Korea's Consumer Price Inflation Drops to 2.1% in 2025, Lowest in Five Years

Annual Inflation Rate Hits Five-Year Low

According to data released by Statistics Korea on the 31st, South Korea’s consumer price inflation for 2025 came in at 2.1%. This is the lowest increase since 2020, when COVID-19 first hit, which saw a 0.5% rise. In December, the consumer price index rose by 2.3%.

Exchange Rate Fluctuations Push Up Import Prices

The main driver behind rising prices is the exchange rate. Fuel prices jumped by 6.1%, marking the largest increase in 10 months since February 2025 (6.3%). Imported goods like beef (up 8%), bananas (6.1%), and kiwifruit (18.2%) have also been heavily affected by currency fluctuations.

Perceived Cost of Living Still High

While official inflation figures are low, many people still feel that prices are climbing. This is mainly because the weaker won has made imported goods more expensive in everyday life. Food and energy costs, in particular, are putting extra pressure on household budgets.

Inflation Outlook for 2026

The Bank of Korea predicts that if the exchange rate stays above 1,470 won to the dollar, inflation could rise above 2.1% next year. The central bank is actively intervening in the currency markets to keep the won stable, having sold $1.74 billion in the third quarter alone to support market stability.

Economic Outlook: Challenges Ahead

Despite efforts to keep inflation in check, South Korea’s overall economic outlook isn’t very bright. Industrial output and capital investment declined by 0.4% and 1.6%, respectively, compared to the previous month. Domestic demand remains sluggish, and the government plans to accelerate spending by executing about 75% of its annual budget in the first half of the year.

Strong Export Growth Masks Structural Concerns

This year, South Korea’s exports surpassed $700 billion for the first time, ranking sixth globally. However, the economy remains heavily reliant on semiconductors, which dominate exports, leading to structural imbalances. Exports of petroleum products, petrochemicals, displays, and secondary batteries declined by double digits. The drop in electric vehicle battery demand has led some domestic suppliers to cancel supply contracts recently. The Korea Institute for Industrial Economics & Trade forecasts that from 2026 onward, U.S. tariffs will start to impact exports, leading to a 0.5% decrease in export performance.