[Why&next] Oil Prices Surge, Inflation Returns to 3% Range... From 2.3% to 3.4% in One Month

Statistics Korea August Consumer Price Trends
Significantly Reduced Decline in Petroleum Prices
Agricultural Product Prices Rise Due to Heatwave and Heavy Rain
"2% Range Expected Again in October"
Government Mobilizes Full Effort for Price Stability

Amid rising prices of fruits and vegetables, including apples, due to the monsoon and typhoons, citizens visiting Gyeongdong Market in Dongdaemun-gu, Seoul, are purchasing fruits on the 28th. Photo by Kang Jin-hyung aymsdream@

Last month, consumer prices rose 3.4% compared to the same month last year. Compared to the previous month, they jumped 1.0%, marking the steepest increase since September 2000 on a month-to-month basis. This is due to the recent surge in oil prices and unstable prices of agricultural, livestock, and fishery products caused by heavy rain and heatwaves. The government expects the inflation rate to fall back to the 2% range starting in October, as there is little change in core inflation excluding temporary factors.

According to the 'August Consumer Price Trends' released by Statistics Korea on the 5th, the consumer price index last month was 112.33, up 3.4% from the same month last year. All components of the consumer price index, including agricultural, livestock and fishery products, industrial products, electricity, gas, water, and services, showed an upward trend. Compared to the consumer price index of 111.20 in July, it rose by 1.0%. This is 1.1 percentage points higher than the July inflation rate of 2.3%.

The Decline in Oil Prices Has Significantly Narrowed... Agricultural Prices Rise Due to Heatwaves and Heavy Rain

The consumer price inflation rate has been on a downward trend since peaking at 6.3% in July last year. It began to fall to 5.7% the following month and dropped to 5.2% in January this year. In July, it hit a 25-month low of 2.3%. However, last month saw the steepest rise in about 23 years, bringing consumer prices back to the mid-3% range seen in April and May.

The main cause of the sharp price increase in August is attributed to petroleum products. Petroleum prices fell 11.0% compared to the previous year, a significant reduction in the decline from last month's -25.4%. As international oil prices rose recently, the base effect disappeared due to the slowdown in the decline of petroleum prices, pushing the consumer price inflation rate back into the 3% range. Kim Bo-kyung, Economic Trend Statistics Officer at Statistics Korea, said, "About 80% of the increase from 2.3% to 3.4% in inflation is due to petroleum products."

It is uncertain whether petroleum prices, which account for most of the inflation increase, will quickly stabilize. Unlike other items that show seasonal trends, international oil prices are difficult to predict based on past trends. Kim also said, "Prices slightly fell from mid-August but then rose again," adding, "It is unlikely that petroleum prices will rise as much this month, but it is difficult to forecast."

The fuel price information board at a gas station in Seoul city on the 14th of last month. Photo by Hyunmin Kim kimhyun81@

According to the New York Mercantile Exchange and the UK ICE Futures Exchange, West Texas Intermediate (WTI) crude oil prices have risen daily since the 24th of last month, surpassing $85 per barrel, while Brent crude recently exceeded $88. Dubai crude, the benchmark for oil imported into Korea, also approached the $90 mark at $89 per barrel. Dubai crude was around $73-$75 per barrel in May but has steadily increased, surpassing $80 in July and fluctuating between $85 and $89 recently. Generally, international oil prices exert upward pressure on domestic petroleum product prices with a lag of about 2-3 weeks.

Adverse weather conditions such as heavy rain also stimulated prices. Agricultural, livestock, and fishery products in the consumer price index rose 2.7%. In particular, agricultural product prices increased 5.4% compared to a year ago. Prices of apples (30.5%), watermelons (18.6%), and peaches (23.8%), which are highly affected by sunlight and rainfall, rose. Sweet potatoes (22.0%) and mackerel (9.7%) also saw significant increases.

Accordingly, the living cost index, composed of frequently purchased and high-expenditure items, surged from 1.8% in July to 3.9% last month. This increase is the largest since the 4.4% rise in March. Within the living cost index, the food price increase rate was 4.7%, higher than the 3.3% increase rate for non-food items. The fresh food index, consisting of fresh fish, vegetables, and fruits, also rose 9.9% month-on-month and 5.6% year-on-year.

"Inflation Will Fall Back to the 2% Range in October, Full Effort to Stabilize Prices"

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is having a luncheon meeting with accompanying reporters at a sashimi restaurant in Geoje-si, Gyeongnam on the 4th.
[Image source=Yonhap News]

The government diagnosed that the sharp rise in inflation last month should be seen as a temporary phenomenon since there is little change in core inflation. The 'index excluding agricultural products and petroleum products' used by Korea rose 3.9% year-on-year, and the OECD's core inflation index excluding food and energy rose 3.3% during the same period. Both indicators showed the same rate of increase as the previous month.

It also forecasted that the consumer price inflation rate will fall back to the 2% range by October. On the previous day, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho told reporters, "Demand will increase significantly during the Chuseok peak season, so there may be some fluctuations, but we expect the inflation rate to be in the low 3% range," adding, "From October, it will stabilize quickly, and by October, November, or December at the latest, it will return to the 2% range."

The Bank of Korea also held a 'Price Situation Review Meeting' chaired by Deputy Governor Kim Woong on the same day, forecasting that after October, the rise in personal service prices will slow, and agricultural product prices will stabilize seasonally, fluctuating around 3%. However, the Bank explained that uncertainties related to future international oil price trends remain significant.

Kim Byung-hwan, First Vice Minister of the Ministry of Economy and Finance, is speaking on the comprehensive response to price and livelihood stabilization, including stabilizing prices of Chuseok seasonal goods, at the Emergency Economic Vice Ministers' Meeting held on the 5th at the Government Seoul Office in Jongno-gu, Seoul. Photo by Jo Yong-jun jun21@

The government plans to swiftly implement measures to stabilize the rapidly rising prices by monitoring price and supply-demand trends by item and pushing forward with Chuseok livelihood stabilization measures at a rapid pace. It will release 11,000 tons of reserved cabbage and radish, and import as much as possible of the allocated tariffs for chicken (30,000 tons) and pork (15,000 tons) before Chuseok. The government will also invest a record 67 billion won in discount support events for agricultural, livestock, and fishery products, running until the 28th. Prices of 20 major seasonal items will be managed to remain at least 5% lower than last year.

Kim Byung-hwan, First Vice Minister of the Ministry of Economy and Finance, held the 30th Emergency Economic Vice Ministers' Meeting at the Government Seoul Office and emphasized, "We will make every effort to stabilize prices," adding, "We will faithfully implement the Chuseok livelihood stabilization measures announced last week."