Soaring Oil Prices Threaten End of 2% Inflation... Fears of Stagflation Loom

After US-Iran War, Major Oil Producers Cut Output
Upward Pressure on Recently Stabilized Consumer Prices
Concerns Over Supply Shortages and Black Market if Price Controls Imposed

As the war between the United States and Iran pushes international oil prices above $100 per barrel, the "2% inflation rate" that was barely maintained is now under serious threat. The price indicators, which had shown stability for six consecutive months, have hit the obstacle of soaring oil prices. There are concerns that the shock from this situation may be even greater than during the Russia-Ukraine war. In particular, if the war drags on and stagflation sets in—with prices rising amid an economic slowdown—it could become difficult to achieve this year's economic growth target of 2.0%.

As international oil prices rise due to the war between the United States and Iran, domestic gas station fuel prices are also increasing daily. At a gas station in Jung-gu, Seoul, on the 6th (right photo), gasoline was priced 20 won higher and diesel 50 won higher compared to the previous day, the 5th. 2026.03.06 Photo by Dongjoo Yoon

International Oil Price Surpasses Psychological Resistance of $100... 2% Inflation Rate 'Shaken'

According to Bloomberg on the 9th (local time), as of 7 a.m. Korean time that day, both Brent crude and West Texas Intermediate (WTI)—the benchmarks for international oil prices—exceeded $100 per barrel. This is the first time since the start of the Russia-Ukraine war in 2022 that WTI and Brent have crossed the "psychological resistance" line of $100 per barrel.

Since the United States-Iran war broke out at the end of February, major oil-producing countries in the Middle East have reduced output, leading to a sharp spike in international oil prices. With the Strait of Hormuz—an essential oil shipping route—effectively blocked and ongoing attacks on energy facilities, high fuel prices appear inevitable for some time.

The sudden surge in international oil prices threatens to directly impact the recently stabilized domestic consumer price inflation. Last year, the consumer price inflation rate soared above 3% in the first half, but thanks to falling oil prices and government stabilization measures, it settled in the low 2% range in the second half. In January and February of this year, inflation matched the Bank of Korea's price stabilization target of 2.0% for two consecutive months. Although service prices rose due to the Lunar New Year holiday, the fall in international oil prices led to a 2.4% drop in petroleum product prices, which played a key role in pulling overall inflation down before the Middle East crisis affected the market.

However, the sudden spike in oil prices originating from the Middle East has significantly increased inflationary pressure on consumer prices for March. Since gasoline and diesel are essential goods that are difficult to substitute and account for a substantial portion of household expenses, they have a considerable impact on consumer inflation. Lee Dowon, Director of Economic Trends Statistics at the National Data Office, stated, "The recent situation in the Middle East has caused gasoline prices to rise sharply," adding, "This will be reflected in the March inflation indicators."

If this trend continues, the 2% inflation regime that has lasted for six months may collapse. Kang Insu, Professor of Economics at Sookmyung Women's University, explained, "When international oil prices rise, it leads to higher gas station fuel prices, which then drives up logistics and transportation costs. This increases overall industry costs and can intensify domestic inflationary pressure."

Consumer Inflation Hit 5.1% During Russia-Ukraine War..."Impact Could Be Greater This Time"

There is an even greater sense of crisis than during the Russia-Ukraine war in 2022. At that time, the annual consumer inflation rate hit 5.1%, the highest since the foreign exchange crisis in 1998. Rising petroleum prices drove inflation. Gasoline and diesel prices surpassed 2,100 won per liter, and the inflation rate for petroleum products jumped from 31.6% in March to 35.2% in July. Experts analyzed that if not for the surge in petroleum prices, the overall inflation rate would have stayed in the 2-4% range, rather than 4-6%.

The reason the current situation is considered more dangerous is the "directness of the supply chain." In 2022, the problem was an indirect supply disruption caused by the ban on Russian oil. However, this time, it is the Middle Eastern supply system—responsible for 70% of Korea's crude oil imports—that is being shaken.

A sharp rise in the consumer inflation rate would also disrupt this year's GDP growth target of 2.0%. The Ministry of Economy and Finance and the Bank of Korea predicted that the Korean economy would grow by 2.0% this year. However, the Hyundai Research Institute forecast on the 3rd that if an "oil shock" scenario similar to those in the past plays out and the average annual oil price surges to $150 per barrel, Korea's economic growth rate could drop by 0.8 percentage points.

The government had set this year's forecast based on Dubai crude at $62 per barrel, but prices have already surpassed $100. As rising oil prices stoke inflation fears, there are growing concerns that stagflation—where prices rise amid economic stagnation—could emerge.

Government on 'High Alert'... 30-Year-Old 'Price Ceiling' System Revived Amid All-Out Response

The government is now in a state of high alert, concerned that the reins on inflation, which had just been brought under control, may slip. Under President Lee Jaemyung's orders, all ministries are investigating unfair practices such as price-fixing across major sectors. With gas stations nationwide raising retail prices sharply, citing higher international oil prices, the government has even resurrected the oil price ceiling system for the first time in 30 years. Nationwide, the psychological threshold of 2,000 won per liter for fuel prices is now within sight. According to Opinet, the oil price information system of Korea National Oil Corporation, as of the 8th, the national average price for diesel stood at 1,918 won per liter, and gasoline at 1,895 won per liter—up 327 won and 205 won, respectively, compared to two weeks prior.

The price ceiling system is stipulated in Article 23 of the Petroleum and Alternative Fuel Business Act, which states that "If there is concern that national economic stability may be undermined, the Minister of Trade, Industry and Energy may designate a maximum sale price for oil refiners, exporters, or sellers." Violators face up to two years in prison or fines of up to 20 million won. All excess profits are confiscated as an emergency measure. Except for the first and second oil shocks in the 1970s and 1980s, the price ceiling system has never been implemented. Kim Jeonggwan, Minister of Trade, Industry and Energy, said, "Preparations are nearly complete, and we plan to monitor the market a bit longer before taking action."

However, it remains uncertain whether this measure will actually be implemented. While it is a step that could stabilize fuel prices, price controls can distort the market. If selling oil leads to losses, suppliers may avoid selling altogether, resulting in a "supply cliff." Jang Youngsoo, Professor at Korea University Law School, commented, "If price controls are enforced, illegal transactions may increase, and if suppliers determine they cannot make a profit, sales could be halted altogether," adding, "In this case, the official market would shrink, and illegal trading could actually increase."

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