Energy-Driven Inflation Fear... Global Financial Markets Turmoil

New York Stock Market Closes Down Across the Board... Domestic Market Plummets and Exchange Rate Rises
Inflation Rise → Consumption Contraction → Economic Slowdown 'Stagflation' Concerns

[Asia Economy New York=Correspondents Baek Jong-min and Park Byung-hee] International oil prices have surged past $80 per barrel, reaching the highest level in seven years, deepening the dark clouds over global inflation. With coal and natural gas prices already soaring, causing energy crises in China and Europe, the sharp rise in oil prices is further intensifying the energy crisis.

Concerns that energy-driven inflation could trigger central banks to raise interest rates are unsettling global financial markets. Following the news that West Texas Intermediate (WTI) crude oil prices surpassed $80, major indices on the New York Stock Exchange closed lower on the 11th (local time). The 10-year U.S. Treasury futures yield rose to 1.612%, reflecting inflation worries.

Domestic financial markets are also volatile on the 12th. As of 10 a.m., the KOSPI index showed a sharp decline of over 1.5%, while the won-dollar exchange rate rose more than 5 won compared to the previous day, surpassing 1,200 won per dollar during trading hours.

There is also analysis that the risk of stagflation?where rising prices suppress consumption, leading to economic slowdown while inflation continues to rise?has increased.

◆ Energy Prices to Rise Further = The impact of the energy crisis is spreading across the commodity markets. With winter approaching and heating demand surging, energy prices are expected to continue rising. Some analyses suggest that oil prices could soon surpass $90 per barrel. Investment bank Goldman Sachs forecasted at the end of last month that Brent crude prices would exceed $90 by the end of this year. Goldman Sachs also raised its WTI price forecast from $77 to $87.

Concerns are growing that natural gas prices, which have temporarily stabilized, could rise further. Qatar, the world's largest liquefied natural gas (LNG) producer, stated that it is currently producing at maximum capacity and that it is difficult to significantly increase production in the short term.

Over the past weekend, heavy rains in Shanxi Province, China's largest coal-producing region, worsened the power shortage crisis in China. News that 60 coal mines were closed due to flooding in Shanxi caused Chinese coal futures prices to soar to record highs. Coal futures traded on the Zhangzhou Commodity Exchange rose 11.6% on the 11th to 1,408.20 yuan per ton.

The power shortage in China also pushed aluminum prices to their highest level in 13 years. On the same day, aluminum futures on the London Metal Exchange (LME) surged as much as 3.3%, reaching $3,064 per ton, the highest since July 2008. Aluminum is a metal with high power consumption, requiring 14 MWh of electricity to produce one ton.

◆ Concerns Over Economic Slowdown... Fed's Choice = The sharp rise in energy prices is having ripple effects on the economy through various channels.

First is the possibility of economic slowdown. On this day, investment bank Goldman Sachs lowered its forecast for U.S. economic growth this year from 5.7% to 5.6%. This revision cannot be separated from the impact of soaring oil prices. Neil Beveridge, an analyst at Bernstein, expressed concern that "historically, rising energy prices have led to recessions and have reduced consumers' real incomes." Steve Englander, head of North American macro strategy at Standard Chartered, told Bloomberg in an interview that "upcoming data releases could increase concerns about stagflation."

With inflation risks rising, there are also expectations that the U.S. central bank, the Federal Reserve (Fed), will accelerate its tightening measures. Although the U.S. Labor Department's September employment report released on the 8th was weaker than expected, soaring prices suggest that the Fed will announce its tapering (asset purchase reduction) plan as scheduled in November. The market is closely watching the North American Consumer Price Index (CPI) on the 13th and U.S. retail sales data on the 15th.