Producer and Consumer Prices Reflected with Time Lag
Ukraine Crisis and Heavy Rain Impact Are Variables
[Asia Economy reporters Seo So-jung and Moon Je-won] Due to the drop in international oil prices, import prices have turned to a downward trend for the first time in three months, raising interest in whether this will have a positive effect on easing inflation in the future. When import prices fall, the domestic Producer Price Index (PPI) decreases, which in turn affects the Consumer Price Index (CPI) after a time lag, thereby reducing inflationary pressure. However, the ongoing Ukraine crisis and recent record heavy rains have caused agricultural product prices to soar, acting as factors driving domestic price increases.
According to the Bank of Korea on the 12th, the shift to a decline in import prices in July after three months was largely influenced by the drop in international oil and grain prices. The average price of Dubai crude oil last month was $103.1 per barrel, down 8.9% from the previous month. The Dubai crude oil price, which was $83.5 per barrel in January this year, surpassed the $100 mark in March at $110.9 per barrel. After soaring to an average of $113.3 in June, it eased to $103.1 in July, returning to the level of April ($102.8).
The international grain prices, which surged due to the Russia-Ukraine war, are also calming down thanks to the resumption of exports. The July World Food Price Index released by the United Nations Food and Agriculture Organization (FAO) recorded 140.9 points, down 8.6% from the previous month. This is the largest decline since October 2008.
As international oil prices and other factors that had driven up import prices fell, not only the import price index but also the export price index showed a downward trend in July. The import price index in July was 153.49 (2015=100), down 0.9% from the previous month, marking a decline for the first time in three months. The export price index also fell 2.1% from the previous month to 129.76, showing a decline for the first time in seven months. However, compared to July last year, these are still 27.9% and 16.3% higher, respectively.
Seo Jeong-seok, head of the price statistics team at the Bank of Korea, explained, "The import price index fell as prices of minerals, coal, and petroleum products declined due to the drop in international oil prices," adding, "The main reason for the decline in export prices is also international oil prices." He continued, "The decline in import prices is expected to affect the decrease in consumer prices in the future."
With import prices somewhat easing, there is an analysis that domestic consumer prices may be nearing their peak. On the previous day, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said at the government Sejong office, "There are some positive signs such as the slowdown in the US inflation rate and the drop in international oil prices," and predicted, "The inflation rate will peak around September to October and then stabilize." Regarding forecasts that this year's consumer price inflation will exceed 5%, he said, "Unless unexpected variables arise, the upward trend will gradually slow down after Chuseok, peaking in September or at the latest October, and then decline. However, we need to further examine how the recent heavy rains will affect crop yields."
Professor Kim Tae-gi of Dankook University’s Department of Economics said, "Since Korea has a high dependence on crude oil and a large import ratio, if oil prices stabilize, it will help stabilize producer and consumer prices," adding, "Although prices are expected to stabilize in the second half of the year after Chuseok, international uncertainties such as the Ukraine crisis remain significant, so it is not yet a stage to be complacent."
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