Domestic Price Increase Due to Rising Import Prices... Eased Outlook for Second Half of the Year

Korea Institute for Industrial Economics and Trade, Report on 'Characteristics and Implications of Inflation in Korea'

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Kwon Haeyoung] Recently, South Korea's inflation has been attributed to rising import prices, particularly in energy and food, according to an analysis by the Korea Institute for Industrial Economics and Trade. However, inflation is expected to ease in the second half of the year due to the stabilization of international oil prices and a slowdown in the global economy.

According to the report titled "Characteristics and Implications of South Korea's Inflation," released by the Korea Institute for Industrial Economics and Trade on the 28th, the domestic import price growth rate exceeded 33% as of June, and the contribution of import prices to the producer price inflation rate was estimated to be between 73% and 82%.

The report analyzed that the rise in import prices for food items such as fertilizers and agricultural products, as well as energy, corresponds to cost-push inflation driven by increased costs.

The increase in import prices was influenced not only by international prices but also by the rise in exchange rates. The report's analysis indicates that about one-third of the overall import price increase from January to June this year was due to exchange rate appreciation.

When comparing the cost increase due to rising import raw material prices and the domestic price increase by major items, petroleum and coal products showed the largest gap, with price growth rates exceeding cost growth rates by more than 30 percentage points. Conversely, electricity and gas, sectors with a high public sector share, had price growth rates more than 20 percentage points lower than cost growth rates.

In particular, South Korea's high dependence on energy imports and the significant share of energy-intensive industries mean that producer prices are greatly affected by changes in imported energy prices.

It was also analyzed that South Korea's sensitivity to import prices is gradually increasing. The cross-correlation coefficient between import prices and producer prices rose from 0.830 during 1990?2007 to 0.936 during 2008?2022. The cross-correlation coefficient between import prices and consumer prices increased from 0.336 to 0.816 over the same period. The report attributes this to the growing external dependence of the Korean economy and the faster transmission of shocks due to globalization, digitalization, and financialization. The increased volatility of import prices, including international oil prices, after the financial crisis also played a role.

The report explains that during economic crises, a sharp rise in the won-dollar exchange rate causes import prices to surge, leading to inflation. However, barring unforeseen events, inflation is expected to ease in the second half of the year due to the stabilization of international oil prices and a slowdown in the global economy.