[Weekly Review] Producer Prices Hit 'Record High' Amid Rising Oil Prices... High Inflation Expected Through Year-End

September Producer Prices Hit All-Time High
Government Officially Announces 'Fuel Tax Cut'
Carbon Neutrality Committee Raises NDC to 40%

[Asia Economy Reporter Joo Sang-don] Producer prices rose again last month, marking an 11th consecutive month of increase. Since hitting an all-time high in April, the index has been setting new records for six consecutive months. Considering that producer prices are a leading indicator of consumer prices, inflationary pressures are expected to continue into the fourth quarter.

The Bank of Korea announced on the 20th that the Producer Price Index for September was 111.13 (2015=100), up 0.2% from the previous month, marking the highest level since statistics began in January 1965. The Producer Price Index measures price changes of goods and services supplied by domestic producers to the domestic market and is a factor influencing consumer prices.

Price strength was observed mainly in manufactured goods, electricity, gas, water, and waste. Manufactured goods rose 0.3% month-on-month, continuing a 16-month upward trend. Among manufactured goods, coal and petroleum products increased by 2.1%, primary metals and chemical products each rose by 0.4%. Electricity, gas, water, and waste increased by 2.0%. Energy prices also rose 2.1%, supported by rising international oil prices.

◆Government Officially Announces 'Fuel Tax Cut'... Expected to Drop by 123 KRW per Liter= The Ministry of Economy and Finance is confirmed to be considering a plan to reduce fuel tax by 15% until March next year. Earlier, Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki said regarding the fuel tax cut, "It will be at a level that extends beyond this winter," revealing the specific timing and extent of the cut. The government has officially formalized a temporary fuel tax reduction.

A ministry official said on the 22nd, "We are considering a plan to cut fuel tax by about 15% for around six months." Considering that the average gasoline price in Seoul exceeds 1,820 KRW per liter, a 15% cut in fuel tax would bring the price down to the low 1,700 KRW range.

The government plans to announce the specific reduction rate and timing next week. Lee Eok-won, First Vice Minister of Economy and Finance, presided over the 'Price-related Vice Ministers' Meeting' at the Government Seoul Office on the same day and stated, "We will temporarily reduce the fuel tax," adding, "Details will be announced at the Emergency Economic Central Disaster and Safety Countermeasures Headquarters meeting on the 26th."

If the fuel tax is cut by 15%, gasoline prices will drop by up to 123 KRW per liter, diesel by 87 KRW, and liquefied petroleum gas (LPG) butane by 30 KRW. Fuel tax consists of transportation tax, education tax, and driving tax. The statutory rate for transportation tax is fixed at 475 KRW per liter (for gasoline). Applying the flexible tax rate under the Enforcement Decree of the Tax Law, transportation tax for gasoline is 529 KRW, driving tax is 138 KRW, and education tax is 79 KRW, totaling 746 KRW per liter of gasoline. Including value-added tax, it becomes 820 KRW. A 15% cut from 820 KRW equals 123 KRW. Considering the average gasoline price in Seoul is 1,825 KRW per liter as of this date, subtracting 123 KRW results in 1,702 KRW.

Regarding this, the Ministry of Economy and Finance stated, "The government is currently reviewing the fuel tax cut plan, but specific details such as the reduction rate and application period have not been decided."

◆Concerns Over Sharp Rise in Carbon Credit Prices Due to NDC Increase... Electricity Rates Also Expected to Rise= The Presidential Carbon Neutrality Committee has finalized an aggressive carbon neutrality goal to reduce greenhouse gas emissions by 40% by 2030 and achieve net-zero carbon emissions by 2050, raising the possibility of sharp increases in carbon credit prices and electricity rates. The burden felt by not only the industrial sector but also the entire population is expected to increase.

According to the final '2050 Carbon Neutrality Scenario' announced by the Carbon Neutrality Committee, the industrial sector must reduce greenhouse gas emissions by 80.4% compared to 2018 emissions (260.5 million tons) by 2050. In line with the increased Nationally Determined Contribution (NDC) target, the industry must reduce 37.9 million tons of carbon by 2030 and an additional 171.5 million tons by 2050. Especially with the NDC increase confirmed, there is a high likelihood that companies' carbon credit purchase costs will surge starting next year. The committee also indicated the possibility of a sharp rise in carbon credit prices in the scenario announced the day before, stating, "The total emission allowance under the emissions trading system must be strictly managed to induce carbon neutrality achievement."

The industrial sector is on high alert. The steel industry, which accounts for 8% of global carbon emissions and faces significant carbon neutrality pressure, is expected to bear an increased burden. In the first half of this year, companies' emission liabilities amounted to about 420 billion KRW, and as companies increasingly seek to secure emission permits, emission liabilities are expected to rise accordingly. Emission liabilities are provisions set aside to purchase carbon credits in the market when greenhouse gas emissions exceed the government-allocated emission volume. According to related industries, the top five companies with the largest greenhouse gas emission liabilities recorded a cumulative total of 419.6 billion KRW in emission liabilities reflected in their financial statements for the first half of this year. Among domestic companies, Kia has the largest emission liabilities at 216.9 billion KRW, followed by Hyundai Steel with 133.9 billion KRW and POSCO with 42.2 billion KRW.

◆Exports Up 36.1% This Month... Will the Growth Continue for 12 Consecutive Months?= Exports through the 20th of this month increased by more than 36% compared to the same period last year, continuing the growth trend that began in November last year. If exports increase for the entire month, the export growth streak will extend to 12 consecutive months.

According to the Korea Customs Service on the 21st, exports from October 1 to 20 amounted to 34.2 billion USD, up 36.1% (9.07 billion USD) from the same period last year. As a result, cumulative exports reached 501.8 billion USD, an increase of 26.8% (106.13 billion USD) compared to the same period last year.

The number of working days from October 1 to 20 was 13 days, one day more than the 12 days in the same period last year. Considering this, the average daily export value increased by 25.7%, from 2.09 billion USD in October last year to 2.63 billion USD this October.

By item, exports increased compared to the same period last year in semiconductors (23.9%), petroleum products (128.7%), passenger cars (10.5%), wireless communication devices (2.6%), ships (93.5%), and precision instruments (26.7%).

By country, exports increased to China (30.9%), the United States (37.1%), the European Union (EU, 42.1%), Vietnam (15.0%), Japan (51.9%), and Taiwan (61.4%).