KDI: Prolonged High Oil Prices Could Raise Consumer Inflation by 1.6 Percentage Points

Announcement of the Impact of Rising International Oil Prices on Inflation
Projections Exclude Policies Such as Oil Price Caps and Fuel Tax Cuts
"Inflation Could Rise by 3.7% Without a Price Cap"

The Korea Development Institute (KDI), a government-funded research institute, has analyzed that if high oil prices persist, this year's consumer price inflation rate could rise by up to an additional 1.6 percentage points.

Sangseok Ma, Research Fellow at the Economic Forecasting Department of KDI, presented a report titled "The Impact of Recent International Oil Price Increases on Consumer Prices" on the 11th. According to the report, increases in oil prices driven by uncertainty in energy transportation could raise this year’s consumer price inflation rate by approximately 1.0 to 1.6 percentage points, depending on the scenario. If these figures are simply added to KDI’s earlier forecast of a 2.1% inflation rate for 2024, announced in February, the inflation rate could soar to as high as 3.7%.

Sangseok Ma, a research fellow at the Korea Development Institute's Economic Outlook Office, is presenting the report titled "The Impact of Recent International Oil Price Increases on Consumer Prices" on the 11th. KDI

However, these projections do not take into account the effects of government policy measures such as a cap on oil prices or reductions in fuel taxes. Ma added, "When considering the effects of policy responses such as price caps, we do not expect the actual inflation rate to reach the 3% range." KDI is scheduled to release a revised economic outlook on the 13th.

Inflation by Scenario: Prolonged High Oil Prices if Oil Remains at 105 Dollars

KDI presented three scenarios based on trends in international oil prices. Specifically, under the "base scenario," the estimated impact of higher oil prices on consumer price inflation this year is 1.2 percentage points, with a modest decrease to 0.9 percentage points next year. This scenario assumes that the price of Dubai crude averages 100 dollars per barrel in the second quarter of this year, then gradually declines to 90 dollars and 87 dollars in the third and fourth quarters, respectively.

In the "prolonged high oil price scenario," where international oil prices remain at the April average of 105 dollars per barrel throughout the second to fourth quarters of 2024, the contribution to this year’s consumer price inflation rate is estimated at 1.6 percentage points. Next year, the figure stands at 1.8 percentage points, indicating that high inflation would persist.

According to KDI, in the "oil price stabilization scenario," where international oil prices stabilize relatively quickly, inflationary pressures from oil prices would be significantly alleviated starting next year. This scenario assumes Dubai crude falls from 95 dollars in the second quarter to 85 and 80 dollars in the third and fourth quarters, respectively.

Transport Uncertainty Stimulates Core Inflation

KDI also pointed out that oil price increases driven by "transportation uncertainty" have a greater impact on inflation than those caused by simple supply-demand imbalances. When uncertainty in transport routes rises, refiners increase oil stockpiling, leading to sharper price hikes.

This cost pressure spreads beyond petroleum products to industrial goods and services, thereby affecting "core inflation." The analysis found that a 10% rise in Dubai crude prices due to transportation uncertainty would increase the core inflation rate by about 0.10 percentage points.

Ma emphasized, "Government price stabilization policies are a key factor in blocking the ripple effects of oil price increases," and recommended, "Policies should be managed flexibly to prepare for the risk of prolonged oil price hikes and heightened inflation expectations."

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