Corporate-Driven Inflation Tsunami... Home Appliance and Car Prices to Rise One After Another in the Second Half (Comprehensive)

61% of Companies "Will Respond to Further Price Increases by Raising Prices"

[Asia Economy Reporters Sunmi Park, Hyungil Oh, Daeyeol Choi, Donghoon Jung] From automobiles in the second half of the year to electronic products, prices of most products and services that consumers encounter are expected to rise one after another. As companies tighten their belts to protect profitability amid rising raw material prices and logistics costs, additional price increases are expected in the second half of the year, making it impossible to delay product price hikes any longer. There are growing concerns that signs of stagflation, characterized by economic recession and high inflation, are becoming a reality.

69% of All Companies "Increase Product and Service Prices"

According to the Regional Economic Report by the Bank of Korea on the 28th, 7 out of 10 domestic companies (69%) raised product and service prices reflecting the rise in raw material prices. Among companies that did not raise selling prices, more than half (55%) responded that they plan to increase prices within the year. This survey was conducted from May 12 to June 2, targeting 570 companies nationwide (343 manufacturing, 30 construction, 197 service).

Companies are raising product prices because they are suffering serious damage to profitability due to rising raw material and labor costs, the Ukraine crisis, and increased logistics costs caused by lockdowns in some Chinese cities. In particular, with 86% of companies expecting additional inflation in the second half of this year, 61% said they would respond to future inflation by raising prices, making price hikes in the second half inevitable.

Steel prices are expected to rise immediately following Korea Electric Power Corporation's (KEPCO) electricity rate increase starting in the third quarter. KEPCO decided to raise the fuel cost adjustment rate for electricity charges by 5 won per kWh in the third quarter. Last year, the industrial sector's electricity consumption was 291,333 GWh, so if the electricity rate increases by 5 won per kWh, about 1.4567 trillion won more will have to be paid in electricity charges.

This is a significant burden for the steel industry, which is a major electricity consumer. A steel industry official said, "As the proportion of electric arc furnaces increases due to the trend of reducing carbon emissions, the share of electricity charges in product costs is very large," adding, "The electricity rate increase will be directly reflected in costs, so steel prices must rise to protect profitability."

If steel prices rise, a domino effect of price increases will follow in other products such as automobiles, ships, construction, machinery equipment, and home appliances. Finished car prices are already soaring sharply. Due to production disruptions caused by a shortage of vehicle semiconductors, popular models can take more than a year to purchase, so it is not surprising that automakers raise prices further to secure profitability.

Home Appliances, Automobiles, Tires... Nothing Will Avoid Price Increases in the Second Half

Tesla has already raised prices three times this year. In Korea, prices have been raised several times this year alone, with the cheapest Model 3 rear-wheel drive exceeding 70 million won. Compared to the end of last year, it has increased by 10 million won, and compared to its initial release in 2019, by about 30 million won.

Domestic cars are also joining the price hike trend. Hyundai Motor's Ioniq 5, which will accept orders for the model year change from next month, is expected to see a price increase due to increased battery capacity and some added specifications. The new Ioniq 6, to be unveiled next month, is expected by the industry to be priced in the mid-50 million won range, about 5 million won more expensive than existing dedicated electric vehicles. Major models such as Grandeur and Avante have raised prices by tens or hundreds of thousands of won with model year changes, and price hikes are expected to be even larger in the second half.

Tire prices will also rise starting next month. Hankook Tire will raise prices of bus and truck tires by 5-10% from the 1st of next month, and Kumho Tire will increase prices of bus and truck tires by 3-7% from next month. Imported brands have already completed their price increases.

The home appliance industry also sees a high possibility of price increases in the second half.

Even if they cannot immediately raise the factory price of the same product reflecting the increase in product costs, companies have no choice but to reduce marketing and promotion expenses provided to intermediate distributors to protect profitability. As a result, distributors will have to reduce large-scale discounts or planned sales promotions to boost home appliance sales as before. Ultimately, this means consumers will have to pay more for the same products.

An industry official said, "Economic vitality is declining, and home appliance inventories are increasing," adding, "It is difficult to raise factory prices reflecting cost increases during periods of demand slowdown, but indirect methods such as reducing marketing expenses are used, so consumer prices are likely to rise."

"Concerns Over Economic Vicious Cycle... Government Must Play a Role"

Experts warn that if raw material prices rise and companies reflect this by raising product prices, it could lead to a vicious cycle that negatively impacts the Korean economy.

Kim Taegi, Professor Emeritus of Economics at Dankook University, said, "With skyrocketing raw material prices, high interest rates, and high wages increasing production costs, both production and consumption are decreasing, and wages continue to rise, creating a vicious cycle," advising, "The government needs to exercise leadership to persuade labor unions to restrain wage increase demands and companies to delay product and service price hikes."

Sung Tae-yoon, Professor of Economics at Yonsei University, said, "It is true that companies inevitably have to raise product and service prices," adding, "One way is for the government to reduce the burden on companies through tax cuts and other benefits," expressing concern that "Since the Korean economy is experiencing a sharp rise in inflation alongside economic sluggishness, it can be said that it has already entered stagflation."