By Jihoon Lee
SEOUL, April 2 (Reuters) - South Korea's inflation picked up less than expected in March as the government capped fuel prices, but policymakers and economists warned that risks remain tilted to the upside with oil prices surging past $100 a barrel driven by the Iran war.
Asia's fourth-largest economy, which is also the world's fourth-largest importer of oil, introduced last month nationwide fuel prices caps for the first time in nearly 30 years.
The consumer price index rose 2.2% in March
from a year earlier, higher than the 2.0% rise in February but lower than a median 2.4% increase forecast in a Reuters poll of economists.
On a monthly basis, the index rose 0.3%, according to the Ministry of Data and Statistics on Thursday, matching the same 0.3% pace in the previous month, and weaker than a forecast of 0.6%.
"The government's fuel price caps are estimated to have limited the price rise in petroleum products to a significant degree," the Bank of Korea said after the data release, adding that inflation would still be higher in April due to higher oil prices.
Prices of petroleum products jumped 10.4% over the month, but agricultural products fell 3.0% due to an increase in supply.
Annual core inflation, excluding volatile food and energy prices, was at 2.2% in March, lower than 2.3% in February, when it marked the fastest pace since April 2024 on travel demand boosted by the Lunar New Year holidays.
"There might not be an immediate rate hike after March data, but we can't be relieved by it and will still have to put on guards in the medium term," said Stephen Lee, an economist at Meritz Securities in Seoul.
"Fuel prices, even if kept at the levels seen in March, will raise annual inflation over 2.5%, so upward revisions to inflation forecasts are inevitable," Lee said, also noting rising airfare while higher fertiliser costs were squeezing agricultural prices.
The data comes a week before the Bank of Korea meets for the next policy meeting on April 10. In February, just days before the Iran war broke out, the central bank held interest rates steady and signalled no change until August.
The central bank, which targets 2% inflation over the medium term, projected inflation at 2.1% this year in February, based on assumptions of $64-a-barrel oil prices - assumptions since upended by the war.
(Reporting by Jihoon Lee; Editing by Chris Reese, Stephen Coates and Shri Navaratnam)
