"If Global Inflation Rises by 1%p, Korea's Prices Increase by 0.2%p"

Assessing Global Inflation Risks from Multiple Perspectives

Demand Side: Stronger-than-Expected Growth in Major Economies, Expansionary Fiscal Policies

Supply Side: Increased AI Investment, Rising Raw Material and Intermediate Goods Prices Due to Middle East Conflicts

Policy Side: Rising Costs from Protectionism, Expanded Impact of U.S. Tariff Policies

"If global inflation rises by 1 percentage point, domestic prices may also increase by 0.2 percentage points."

A visitor is selecting products at the meat section of a large supermarket in downtown Seoul. Photo by Yonhap News

On March 12, the Bank of Korea stated in its Monetary and Credit Policy Report under the issue analysis titled "Review and Implications of Global Inflation Risk Factors" (Choi Inhyeop, Jeong Seungryeol, Park Geunhyeong, Kim Kyungho, Oh Junghun, Yoo Jaeyoung, Park Chaebin) that "according to the estimation of Korea's Phillips curve considering global inflation, a 1 percentage point rise in global inflation leads to a 0.2 percentage point increase in domestic prices." The report added, "If global inflation risk factors materialize, domestic prices may also rise, so it is necessary to assess risks from various aspects such as demand, supply, and policy."

Global inflation can directly affect domestic prices through increased import prices. The expansion of artificial intelligence (AI) investment and heightened geopolitical risks are considered upward risks that could potentially impact domestic prices. The report explained that it is important to pay attention to the effects of these factors if they materialize. There are also indirect channels of influence. If the uncertainty surrounding major countries' monetary and fiscal policies increases in the future, the impact on domestic prices could be amplified through exchange rate channels.

Choi Inhyeop, Deputy Director of the Policy Analysis Team at the Bank of Korea’s Monetary Policy Department, said, "Given the persistent risks related to global inflation, it is necessary to monitor the development of major risk factors and their direct and indirect effects on domestic prices, and to reflect these observations in future monetary policy directions."

On the demand side, the main risks cited were stronger-than-expected growth in major economies and expansionary fiscal policies. Deputy Director Choi pointed out, "Recently, both advanced and emerging economies have shown stronger-than-expected growth thanks to robust IT sector performance and accommodative monetary and fiscal policies. When both advanced and emerging economies experience simultaneous growth, global inflationary pressure is likely to increase further."

The expansionary fiscal stances of major economies not only support growth but also increase inflationary pressure through the expected inflation channel. He noted, "If expected inflation in major economies remains above the target level and government debt is high, further increases in spending or concerns about fiscal soundness could stimulate expected inflation."

On the supply side, the report identified rising prices of raw materials and intermediate goods resulting from increased AI investment and heightened geopolitical risks as potential risk factors. Recently, as investments related to AI, such as the construction of data centers, have expanded, the prices of semiconductors, natural gas, and non-ferrous metals have continued to rise significantly.

The Middle East risk is also a variable. Deputy Director Choi anticipated, "Recently, due to heightened risks in the Middle East, international oil prices have surged. If instability in the Middle East and international oil prices becomes prolonged, global inflationary pressure could rise significantly."

On the policy side, concerns remain about increased costs stemming from protectionist industrial policies and the expanded impact of U.S. tariff policies. He assessed, "Since COVID-19 and the Russia-Ukraine war, strengthened protectionist industrial policies have intensified supply chain fragmentation and increased production costs, which could act as a medium- to long-term structural upward pressure on prices."

Uncertainty surrounding U.S. tariff policy has increased following the Supreme Court's ruling invalidating reciprocal tariffs. If the scope of tariffed items is broadened or tariff rates are raised further, inflationary pressure in the U.S. could intensify. This could increase uncertainty regarding the U.S. Federal Reserve's monetary policy path and, by strengthening the dollar, could apply upward inflationary pressure on prices in other countries as well. Price increases in goods due to higher tariffs could also raise service sector prices.

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