[BOK Focus] Inflation Analysis Challenging Even for the US... Will BOK's 3.5% Forecast Be Accurate?

Brent and Dubai Oil Prices Surpass $92 per Barrel
Central Bank Faces Growing Concerns Amid Soaring Global Oil Prices
New York Fed: "Uncertainty in Real-Time Inflation Measurement Increases"
Bank of Korea: "Oil Prices Are the Most Important Indicator to Watch"

[Image source=Yonhap News]

Recently, international oil prices have surged above $90 per barrel, raising renewed concerns about inflation in major countries such as the United States and South Korea. Inflation analysis and forecasting are already challenging, and with the added variable of international oil prices, central banks managing monetary policy are facing even deeper dilemmas. The Bank of Korea maintains that it is not yet at a point to revise its initial inflation forecast (3.5% annually), but given the high level of uncertainty, it is closely monitoring the trends in oil prices and inflation.

Inflation Analysis Difficult in the U.S. Too: "Frequent Revisions"

Inflation, the most important indicator for central banks when deciding monetary policy, is a major concern not only in South Korea but also in other major countries like the United States. The Federal Reserve Bank of New York recently attracted attention by releasing a report on how challenging it is to analyze inflation data. The report, published on the 7th by New York Fed economists including Chud Adoli, details how frequently and significantly inflation data are revised.

Unlike South Korea, the U.S. releases both the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index, with the PCE inflation figures often undergoing substantial revisions from their initial release. According to the report, since 2001, monthly U.S. PCE inflation data have been revised by as much as 6 percentage points, and cases where revisions exceeded 1 percentage point accounted for more than 15% of the total.

Jerome Powell, Chair of the U.S. Federal Reserve, stated last year that "PCE is a better indicator than CPI," highlighting the importance of the PCE index in setting the benchmark interest rate. However, even this indicator is often subject to significant later revisions. The CPI, another inflation measure, is revised less frequently than the PCE but still experiences initial figure adjustments ranging from 0 to 1 percentage point on an annualized basis.

The report explains, "Inflation data are frequently and substantially revised with subsequent data releases," adding that "this not only indicates significant uncertainty in measuring inflation in real time but also shows the difficulties policymakers, economic analysts, and the general public face in analyzing inflation." The Bank of Korea's New York office recently drew attention to this report as the latest local data.

Bank of Korea Also Concerned About Inflation Amid Soaring International Oil Prices

South Korea does not publish a PCE inflation index, so revisions to inflation figures are less frequent than in the U.S., but analyzing and forecasting inflation remains equally challenging. A Statistics Korea official explained, "Unlike the U.S., inflation indicators in South Korea are rarely revised," but added, "However, if a price increase for a specific item expected in a certain region is initially reflected but then postponed or canceled in that month, revisions may occur."

When uncertainties surrounding international oil prices or U.S. monetary policy are high, as recently, inflation forecasting becomes even more difficult. The Bank of Korea projected in its revised economic outlook on the 24th of last month that the consumer price inflation rate for this year would reach 3.5% annually, but some analysts are already suggesting an upward revision. This is because international oil prices have surged from the mid-$80s to the $90 range per barrel over the past month.

According to the London ICE Futures Exchange on the 12th (local time), the November delivery Brent crude futures closed at $92.06 per barrel, up $1.42 (1.6%) from the previous session, marking a new high for the year. The New York Mercantile Exchange's October delivery West Texas Intermediate (WTI) crude futures also rose $1.55 (1.8%) to $88.84 per barrel compared to the previous day, and Dubai crude maintained the $90 range for five consecutive trading days before soaring to $92.34.

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on August 24, striking the gavel. Photo by Joint Press Corps

Monetary Policy Also Influenced by Oil Prices and Inflation

The U.S. is scheduled to release its August CPI data tonight, Korean time, with Wall Street expecting a 3.6% year-over-year increase, surpassing July's 3.2% rise. The rise in international oil prices is also one of the biggest concerns in the U.S. If U.S. inflation continues to show stronger-than-expected resilience, expectations for the Fed's tightening monetary policy will increase, potentially pushing up the won-dollar exchange rate and exerting upward pressure on domestic import prices.

However, even if international oil prices remain in the low $90s through the end of the year, the annual average would differ by only $1 to $2 compared to the Bank of Korea's oil price forecast for this year (Brent crude at $82 per barrel), so it is analyzed that this will not significantly impact inflation forecasts or monetary policy. Unless prices surge to around $100 per barrel, the Bank of Korea is unlikely to abruptly change its monetary policy stance, such as raising interest rates due to inflation concerns.

A Bank of Korea official said, "If international oil prices continue in the $90 range from now on, we expect an impact of about $1 to $2 on the annual average price, around $83 to $84," adding, "However, since international oil prices directly affect inflation through domestic petroleum product prices and there is considerable uncertainty with various forecasts from institutions and investment banks (IBs), we are monitoring the situation with the utmost caution."