Rising international oil prices, triggered by the conflict in the Middle East, could increase South Korea's consumer price inflation rate by as much as 1.6 percentage points this year, according to a report from a national research institute. The report also suggests that core inflation, which has been less affected by oil price fluctuations, may rise by 0.1 percentage points.
The Korea Development Institute (KDI) released its report on May 11, analyzing the effects of recent increases in international oil prices on consumer prices. KDI forecasts that fluctuations in oil prices could raise the consumer price inflation rate by 1.0 to 1.6 percentage points starting in the second quarter of this year. If high oil prices persist, core inflation could face upward pressure through next year.
Research indicates that a 10 percentage point increase in international oil prices (Dubai crude) leads to a 2.69 percentage point rise in domestic oil product prices. Typically, increases in Dubai crude do not affect core inflation. However, due to uncertainties in transportation, a 10 percentage point rise in Dubai crude could push core inflation up by 0.10 percentage points.
This means that transportation uncertainties could trigger cost increases not only in oil products but also in industrial goods and services. While the initial impact of rising international oil prices on core inflation is smaller than on consumer prices, its persistence is expected to be greater.
Nevertheless, some analysts believe that government measures, such as price ceilings on oil products, will prevent inflation from exceeding 3%. As of March, the price ceiling was estimated to lower the consumer price inflation rate by 0.8 percentage points, while recent reductions in fuel taxes are believed to have contributed to a 0.2 percentage point decrease. These high oil price countermeasures are also expected to partially alleviate the rise in core inflation.
Ma Chang-seok, a KDI researcher, stated, "If we measure without considering the effects of the price ceiling on oil products and add in the impact of fuel tax reductions, inflation is unlikely to exceed 3%. However, without the price ceiling, a rate above 3% would be quite possible."
The institute views the ongoing developments in the Middle East as uncertain, leading to significant uncertainty regarding future consumer price trends. It suggests that policies should be formulated considering the varying impacts of rising international oil prices on inflation.
Ma emphasized, "While the rise in international oil prices may temporarily affect the prices of certain items, the degree of inflation and its ripple effects can vary depending on the core factors. Policies aimed at stabilizing prices must also prepare for the possibility that prolonged increases in international oil prices could destabilize expected inflation."
* This article has been translated by AI.
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