The Bank of Korea: "If oil prices rise, expected inflation also increases... Heightened concerns over prices"

Amid the collapse of the ruble's value due to Western sanctions following Russia's invasion of Ukraine, ruble banknotes are placed at the Counterfeit Response Center of Hana Bank's headquarters in Jung-gu, Seoul, on the morning of the 8th.
[Image source=Yonhap News]

The Bank of Korea warned on the 13th that the rise in international oil prices due to the Ukraine crisis could raise inflation expectations, acting as an additional upward pressure on inflation.

In its Overseas Economic Focus report titled "The Impact of Rising International Oil Prices on Inflation Expectations in Major Countries," the Bank of Korea explained, "Energy prices have also been soaring recently due to geopolitical uncertainties," adding, "concerns about future increases in inflation expectations are growing."

As a result of an empirical analysis conducted by the Bank of Korea on the impact of international oil prices on inflation expectations, it was found that both the United States and the Euro area showed significant responses in inflation expectations to oil price shocks.

(Data provided by Bank of Korea)

When an oil price shock occurs, it affects inflation expectations with a lag of about one to two quarters, and the higher the oil price level and the more sustained the oil price increase shock, the greater the impact.

According to the Bank of Korea, when oil prices were below $30, the impact on inflation expectations was not significant, but when oil prices were above $120, a 10% increase in oil prices led to an average rise in inflation expectations of 0.3 percentage points in the U.S. and 0.5 percentage points in the Euro area.

Also, based on the maximum response, if the oil price increase shock persisted for four quarters, a 10% rise in oil prices increased inflation expectations by 0.4 percentage points in the U.S. and 0.6 percentage points in the Euro area.

The Euro area, which is relatively more dependent on crude oil imports than the U.S., was estimated to experience a greater impact of oil price shocks on inflation expectations than the U.S.

Both the U.S. and the Euro area have seen inflation expectations rise sharply since the second half of last year due to inflationary pressures. Recently, the U.S. recorded 4.9%, the highest since the second quarter of 2008, and the Euro area recorded 7.0%, the highest since the third quarter of 2008.

(Data provided by Bank of Korea)

Considering these analysis results, the Bank of Korea explained that the rise in international oil prices caused by the Ukraine crisis could further raise the general public's inflation expectations in major countries, which had shown a stable trend so far, thereby amplifying the price transmission effects.

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In South Korea, the general public's inflation expectations reached 2.7% last month, exceeding the price stability target (2%).

The Bank of Korea emphasized, "If inflation expectations in major countries fail to stabilize, it is necessary to be cautious as the global inflationary trend could spread more widely through corporate price-setting and workers' wage negotiations."

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