Oil Prices, Electricity Bills, and Rent All Increased... Inflation Dark Clouds in Q4

Annual Consumer Price Inflation Rate 2.2% Through October... Government Price Management Target Exceeded
Global Supply Chain Disruptions Expand Inflation in Major Countries like US, EU, UK in Second Half
Supply Shortages and 'With Corona' Consumption Add Up... Strong Inflation Factor in Q4

On the 31st of last month, citizens are shopping at a mart in Seoul.
[Photo by Yonhap News]

[Sejong=Asia Economy reporters Son Seon-hee and Moon Chae-seok] Last month's consumer price index rising to the 3% range for the first time in 9 years and 9 months is the result of not only soaring international oil prices but also a temporary base effect from last year's reduction in telecommunications fees. The annual cumulative rate recorded 2.2%, already surpassing the government's inflation management target. Due to global supply chain disruptions, inflation in major countries including the United States, the European Union (EU), and the United Kingdom has also shown an expanding rate of increase in the second half of the year, raising the likelihood that global inflation concerns will become a reality in the fourth quarter of this year.

◆Petroleum products surged 27.3% in one year... all increased = According to the 'October Consumer Price Trends' released by Statistics Korea on the 2nd, the item contributing most to the 3.2% inflation rate last month was industrial products. The price of industrial products rose 4.3% compared to the same month last year, marking the largest increase since February 2012 (4.7%).

In particular, the price increase rate of petroleum products soared by 27.3% during the same period, the highest since August 2008 (27.8%). Gasoline (26.5%), diesel (30.7%), and automotive LPG (27.2%) all rose. Processed foods increased by 3.1%. Statistics Korea explained that this was due to the conservative production increase stance of the international oil-producing countries' coalition and the disruption of oil supply caused by the shutdown of some crude oil production facilities in the Gulf of Mexico due to the impact of hurricanes in the United States.

Last month, electricity, water, and gas prices rose by 1.1% as electricity rates increased for the first time in 8 years. Among goods, agricultural, livestock, and fishery products rose only 0.2%, showing a slowdown in the rate of increase for three consecutive months. Agricultural product prices, centered on vegetables, fell by 6.3%, but livestock products such as eggs, pork, and beef jumped by 13.3%.

Prices of public services, personal services, and rent, which are directly related to people's livelihoods, also rose, pushing the overall service price index up by 3.2%. Due to the base effect from last October's telecommunications fee support, mobile phone charges rose by 25.5%, causing public service prices to increase by 5.4%, while personal services such as dining out and apartment management fees rose by 2.7%. Notably, the jeonse (long-term lease) increase rate recorded 2.5% over one year, the highest since November 2017 (2.6%). Monthly rent also rose by 0.9%, pushing the overall rent price index up by 1.8%.

◆Government forecast missed... annual inflation could reach up to ‘2.3%’ = With October inflation rising above 3%, the possibility of this year's inflation rate also increasing has grown. The year-on-year cumulative consumer price index until last month recorded 2.2%, rising 0.2 percentage points in one month. This is the first time in 9 years since 2012 (2.2%) that the annual inflation rate has reached the 2% range. It not only far exceeded the government's annual inflation management target (2.0%) but also cannot completely rule out the possibility of approaching the mid-2% range. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, has continuously conveyed the message that the annual inflation forecast will be "managed in the low 2% range."

In particular, the strong international oil prices and global supply disruptions are powerful variables that will push up inflation in the fourth quarter. Many expect that the strong oil prices and supply chain issues will continue long-term beyond next year due to consumption recovery. Domestically, the government's 'gradual daily recovery' policy starting this month is also a factor stimulating inflation. There are concerns that various consumption activation measures will further fuel price increases.

Although the government decided on a record-high (20%) reduction in fuel tax, it will be applied from the 12th of this month, and the actual felt effect is expected to appear only at the end of this month, making it difficult for this to be fully reflected as a downward factor for inflation this month.

Kim Kyung-soo, emeritus professor of economics at Sungkyunkwan University, said, "If consumer prices rose only because of oil price increases, it could be seen as 'cost-push inflation' and not be very serious. However, the current cumulative increase of 2.2% should be viewed as the result of 'expected inflation,' where other items have also risen," adding, "When expected inflation operates, the effect of monetary policy to suppress inflation can be limited, and prices may rise even more in the future."

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