"If Major Trading Partners' Inflation Rises by 1%P, Domestic Inflation Increases by 0.24%P"

KIEP Report on 'Domestic Pass-Through and Implications of Global Inflation'

On the 4th, one day before the government's announcement of June consumer price trends, a restaurant in Namdaemun Market, Seoul, is quiet. Photo by Mun Ho-nam munonam@

[Asia Economy Sejong=Reporter Kwon Haeyoung] A study found that if the producer prices of 37 major trading partner countries of South Korea rise by 1 percentage point compared to the previous quarter, domestic consumer prices increase by 0.24 percentage points.

On the 16th, the Korea Institute for International Economic Policy (KIEP) released a report titled "Domestic Pass-Through of Global Inflation and Its Implications" containing these findings.

The report explains that when the producer prices of countries from which South Korea imports raw materials and manufactured goods rise, import prices increase and are reflected in domestic consumer prices. It analyzed that the ripple effects of import price increases by item on domestic producer and consumer prices are mostly reflected within three months, and at the latest within eight months.

As of 2021, South Korea's top nine import countries were China, the United States, Japan, Australia, Germany, Russia, Indonesia, Singapore, and Malaysia, accounting for 80% of total imports. Monitoring the producer and export price trends of these countries can help identify the risk of domestic inflation caused by overseas price increases.

The impact of overseas price increases on domestic prices is much greater than the effect of exchange rate fluctuations. It was estimated that if the value of foreign currencies rises by 1 percentage point against the Korean won, domestic consumer prices increase by 0.04 to 0.07 percentage points. The pass-through rate of overseas price increases to domestic prices (0.24 percentage points) is 6.8 times higher in the short term (3 months) and 3.3 times higher in the long term (2 years) than the pass-through rate of exchange rates.

The report stated, "Since the pass-through effect of import price increases centered on raw materials suggests the possibility of a rise in domestic core prices, price management policies are necessary," and added, "It is essential to continuously monitor overseas price trends."

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