Helpless Against High Oil Prices... KDI Raises This Year's Annual Inflation Rate Forecast from 1.7% to 2.3%

Government: "20% Fuel Tax Cut Policy Results in 0.33%p Inflation Reduction"

[Sejong=Asia Economy Reporter Son Sun-hee] The Korea Development Institute (KDI) has projected that the annual inflation rate will reach 2.3% this year. This is a 0.6 percentage point upward revision from the previous forecast of 1.7%, influenced recently by high oil prices.

According to KDI's recently released "2021 Second Half Economic Outlook" on the 13th, consumer prices are expected to rise by 1.8% in the first half and 2.7% in the second half compared to the same period last year, resulting in an annual increase of 2.3%. This is the first time in nine years since 2012 (2.2%) that the annual inflation rate has reached the 2% range. It also represents a sharp rise compared to last year’s 0.5%.

According to the Consumer Price Trends released monthly by Statistics Korea, the year-to-date inflation rate until last month was 2.2%, but KDI expects it to rise by 0.1 percentage points. In other words, additional upward pressure on prices is expected to continue during the remaining months of November and December.

However, KDI stated, "Although the consumer price inflation rate exceeds 2%, considering the core inflation rate and the level of expected inflation, the risk of prolonged high inflation is not significant at present." Nevertheless, it suggested, "If the high inflation trend continues and medium- to long-term expected inflation rises above the price stability target, it will be necessary to strengthen policy efforts to stabilize expected inflation."

Excluding volatile items such as petroleum products and food, the core inflation rate, which shows the underlying trend, is projected to be 1.2% this year and 1.7% next year. KDI noted, "As the economy recovers mainly through private consumption, the underlying inflation trend is expected to gradually expand."

KDI forecasted that next year’s consumer price inflation will be 1.7%, 0.6 percentage points lower than this year. Although lower than this year, the impact of rising crude oil and raw material prices is expected to dissipate only after mid-next year.

The recent inflation trend is largely influenced by the soaring oil prices. Therefore, attention is focused on oil price trends after next year, but the prevailing view is that prices will generally remain at current levels. In this regard, the Korea Institute for International Economic Policy (KIEP) recently published a global economic outlook report forecasting that "the average international oil price (based on WTI crude) next year will be $61.89 per barrel, slightly lower than this year’s $68.27."

However, a survey conducted by KIEP from October 28 to November 3 among foreign economic experts showed that most experts expect a slight increase in oil prices, responding with an average price of $74.6 per barrel this year and $77.0 per barrel next year.

The government is also closely monitoring price trends, citing global inflation as a major external risk. Kim Young-hoon, head of the Economic Analysis Division at the Ministry of Economy and Finance, said, "It is true that upward pressure on prices has been high in the second half of the year," but added, "However, the base effect from last year’s reduction in communication fees has disappeared, and agricultural product prices are stabilizing, which are downward factors." He continued, "International oil prices will still exert upward pressure, but the domestic fuel tax reduction policy has been applied, and if this is fully reflected, it is expected to lower inflation by 0.33 percentage points." He added that there might be some time lag before this price-lowering effect appears.

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