"When Raw Material Import Price Inflation Rises by 1%P, Producer Price Inflation Expands by 0.13%P"

Price Pass-Through: Manufacturing, Construction, Electricity and Gas, Service Industries in Order

[Asia Economy Reporter Seo So-jeong] It has been found that when the raw material import price inflation rate increases by 1 percentage point, the producer price inflation rate expands by about 0.13 percentage points. The degree of price pass-through by industry in the event of an import price shock was analyzed to be highest in the order of manufacturing, construction, electricity and gas, and services.

On the 30th, the Bank of Korea stated in its report titled "Analysis of Industry-Specific Price Pass-Through of Import Price Increases," "The pass-through of import price increases to final goods prices is greater in the case of raw material import price shocks than intermediate goods," revealing these findings.

Import prices, which have rapidly risen this year, are passed on to the prices of domestically produced goods and services, intensifying domestic inflationary pressures. Typically, the price pass-through of import price increases occurs through the process of 'import price increase → production cost increase → final goods price increase.'

According to the report, the pass-through of import price increases to final goods prices is greater in the case of raw material import price shocks than intermediate goods. Among raw materials, the impact of a 1 percentage point shock to agricultural and marine products such as grains is larger and more prolonged compared to energy and minerals such as metals. In the short term, asymmetry and nonlinearity were confirmed, with a higher degree of price pass-through when import prices rise rather than fall, and when the increase is larger rather than smaller.

Looking at the price pass-through ratio, when the raw material import price inflation rate increases by 1 percentage point, the producer price inflation rate expands by about 0.13 percentage points (price pass-through ratio 0.13), exceeding the price pass-through ratio of imported intermediate goods prices (0.08). By raw material import item, the price pass-through ratio of agricultural and marine products (0.15) was estimated to be higher than that of minerals (0.11).

The degree of price pass-through by industry was estimated to vary depending on factors such as the proportion of imported raw materials input, price elasticity of demand, market concentration, and the possibility of government policy reflection.

In manufacturing, industries with a high proportion of imported raw materials input such as petroleum refining, chemicals, and steel showed significant price pass-through, whereas IT manufacturing and transportation equipment had lower input proportions and demand that was sensitive to price, resulting in a lower degree of price pass-through. Automobiles, as a discretionary good with high price elasticity and low raw material input proportion, were generally evaluated to have a low degree of price pass-through.

In the service sector, the degree of price pass-through was generally not high, but transportation sectors such as aviation and shipping showed relatively large price pass-through due to high raw material input proportions and market concentration.

In construction, the degree to which increased production costs are reflected in final goods prices was high, resulting in significant price pass-through. In the electricity and gas sector, although the proportion of raw material inputs such as coal and natural gas is quite high, price pass-through was partially restricted due to government policies.

Lee Kwang-won, head of the Bank of Korea’s Survey Division, said, "Considering the asymmetry and nonlinearity of import price pass-through, even if international raw material prices fluctuate repeatedly as recently, upward inflationary pressure can be significant," adding, "It is necessary to take into account the large differences in the degree of import price pass-through by industry when conducting price stabilization policies and economic forecasts."