Surging Oil and Commodity Prices Push Import Prices to Highest in Over 7 Years... Will Inflation Rise Further? (Comprehensive)

Bank of Korea 'June 2021 Export and Import Price Index'

[Asia Economy Reporter Kim Eunbyeol] Due to the combined effects of soaring international oil and raw material prices and the relatively rapid economic recovery in the United States, there is a forecast that domestic inflation in South Korea could rise further in the second half of the year. This is because, given South Korea's economic structure, which is heavily influenced by external factors, international prices such as oil have a significant impact on domestic prices. Previously, the government and the Bank of Korea expected inflation in the second half to move around 2.0%, but there is growing weight to the possibility that inflation could rise even more.

According to the 'June 2021 Export and Import Price Index' released by the Bank of Korea on the 14th, last month's import price index stood at 115.43 (2015=100), marking the highest level since September 2014 (115.77). The import price index rose 2.3% month-on-month, increasing for two consecutive months, and jumped 14.0% year-on-year, rising for four consecutive months. Import prices based on contract currency, excluding exchange rate effects, increased 21.8% year-on-year.

The rise in import prices last month was largely due to the increase in international oil prices, which led to a chain reaction of price hikes in minerals, coal, and petroleum products. The price of Dubai crude oil rose from an average of $66.34 per barrel in May to $71.60 per barrel in June. Accordingly, raw materials, mainly minerals, increased 6.4% month-on-month, and intermediate goods such as coal, petroleum products, and primary metal products rose 1.0% month-on-month. By item, notable price increases were seen in crude oil (7.7%), natural gas (9.1%), naphtha (6.9%), hot-rolled steel sheets and plates (8.6%), refined aluminum products (4.1%), and ammonia (7.8%).

The growing likelihood of rising domestic inflation in the second half is because when import prices increase, companies' cost burdens inevitably grow. So far, companies have not passed on the rise in import prices to product prices, but if they can no longer endure this and reflect it in product prices, domestic consumer prices will also rise accordingly. According to the Bank of Korea, oil prices have risen 2.9% month-on-month as of the 9th of this month. The failure of OPEC+, the coalition of major oil-producing countries including the Organization of the Petroleum Exporting Countries (OPEC) and Russia, to reach an agreement on increasing production is also a factor increasing oil price volatility. Kim Younghwan, head of the Price Statistics Team at the Bank of Korea's Economic Statistics Bureau, said, "It is difficult to say that oil prices have declined," adding, "As import prices are rising mainly for raw materials and intermediate goods, the pressure on companies' cost increases will continue."

Domestic consumer prices have shown an expanding rate of increase this year. According to Statistics Korea, the consumer price inflation rate in June was 2.4%, marking the third consecutive month in the 2% range. Consumer prices in the second quarter (April to June) rose 2.5% compared to a year earlier, recording the highest increase since the first quarter of 2012 (3.0%). The core inflation rate also rose to the 1% range for the first time since February 2019. Core inflation excludes volatile food and energy prices and reflects the underlying trend of inflation. Professor Sung Taeyoon of Yonsei University's Department of Economics explained, "Depending on monetary policy in the second half of the year, inflation in the first half of next year could also be affected. If interest rates are adjusted, upward pressure on inflation can be eased."

This content was produced with the assistance of AI translation services.