"Won-Dollar Exchange Rate Instability Fueled Consumer Price Inflation"

Hankyung Research Institute, Report on 'The Impact of Exchange Rate Changes on Inflation'

[Asia Economy Reporter Jin-ho Kim] Recent soaring domestic consumer prices have been analyzed to be significantly influenced not only by the rise in international raw material prices but also by exchange rates. It has been pointed out that efforts should focus on the stable supply of international raw materials and exchange rate stability.

The Korea Economic Research Institute (KERI) made this claim in a report titled "The Impact of Exchange Rate Changes on Prices and Implications" on the 3rd.

While the sharp rise in international raw material prices continues due to supply chain disruptions and the prolonged Ukraine crisis, the won-dollar exchange rate is also showing a steep upward trend. In April this year, the won-dollar exchange rate averaged 1,232.3 won based on the transaction standard rate, marking a 10.1% increase compared to the same month last year, the highest increase rate in 6 years and 2 months (10.8% in February 2016).

Prices are also rising sharply due to the surge in raw material prices and exchange rates. In April, consumer prices rose 4.8% year-on-year, the highest in 13 years and 6 months since October 2008 (4.82%) during the global financial crisis.

Producer prices also rose 9.2% in April. Producer prices have shown an increase rate of over 8% for seven consecutive months since October last year, a longer duration than during the global financial crisis (May to October 2008). The sharp rise in producer prices is due to the surge in raw material import prices. In April, raw material import prices based on the won rose 71.3% year-on-year.

KERI analyzed that the sharp rise in import prices based on the won due to the increase in international raw material prices and won depreciation will continue to cause a chain effect leading to steep rises in producer and consumer prices for the time being.

KERI estimated the impact of the won-dollar exchange rate increase on consumer and producer prices using monthly data over 19 years from February 2003 to February 2022. The analysis showed that if the won-dollar exchange rate rises by 1 percentage point year-on-year, consumer prices increase by 0.1 percentage points, and producer prices rise by 0.2 percentage points.

Based on the estimation results, KERI estimated the impact of the won-dollar exchange rate change in the first quarter of this year (an 8.2% increase compared to the same period last year) on the inflation rate during the same period. The analysis showed that consumer prices rose 3.8% in the first quarter, with the exchange rate increase contributing 0.7%. This means that if the exchange rate had been stable, consumer prices in the first quarter could have been 3.1%. Producer prices also rose 8.8% in the first quarter, with the exchange rate increase contributing 2.0%.

Choo Kwang-ho, head of KERI's Economic Policy Office, said, "It has been empirically confirmed that when the won-dollar exchange rate rises, the import price of raw materials for companies increases, leading to rises in producer and consumer prices." He added, "To stabilize prices, efforts should be made to overcome difficulties in the supply of international raw materials, but full efforts must also be made to stabilize the exchange rate, such as turning the trade balance to surplus."

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