"No Dollar Spent but Ramen Prices Rise" Impact of Exchange Rate Increase [The Fall of Won]②

High Exchange Rate Pushes Up Import Prices, Fueling Consumer Price Increases
January Inflation Rate at 2.2%... Exchange Rate Threat Remains Despite Base Effects
Excessive Exchange Rate Rise Diminishes 'Export Effect'... "Warning Signs for Low Growth"

Office worker Lee Jaehyun (27, pseudonym) came across news about the foreign exchange market fluctuating due to the soaring won-dollar exchange rate. However, he did not think this situation would bring about changes that could be felt immediately in daily life. He neither had family studying in the United States nor any plans to travel to countries using the dollar in the near future. With these thoughts, he turned off the boiler that had been running all night, grabbed his phone, and boarded the bus to work. He bought a glass of orange juice at a cafe in front of the company and substituted lunch with bread.

Is there really no change that Lee can feel? Not at all. The depreciation of the won against major currencies such as the dollar typically fuels inflation, affecting the lives of the public. The key factor that stimulated consumer prices again at the beginning of the year was the rising exchange rate. Experts agree that inflation this year is expected to remain near the hard-won price stability target (2.0%), but they unanimously point out that exchange rate volatility poses the greatest threat. If the exchange rate continues its high-level march, concerns arise that it will negatively impact various sectors of our economy, including prices, exports and imports, and production, deepening the pit of low growth.

High exchange rate raises import prices → passed on to consumer prices... Stability barely achieved threatened again

The rising exchange rate pushes up major price indices, including import prices. When the exchange rate jumps, even products priced the same in dollars require more won to be paid for import. This leads to increased prices of imported raw materials along with imported consumer goods. It not only burdens consumers with higher prices but also causes cost increases for domestic companies.

Recently, prices of major agricultural products such as soybeans and oranges have surged due to abnormal weather, and the rising exchange rate has poured fuel on the fire, causing import prices to rise further. This affects domestic food prices with a time lag. The food industry has consecutively raised prices of products such as ramen, snacks, and bread, which use soybeans and wheat, due to rising import prices. The coffee industry’s recent price hikes are also due to soaring coffee bean prices caused by the high exchange rate. According to the Bank of Korea, the import price index in December last year was 142.14, up 2.4% from the previous month (138.80), marking the largest increase since April last year (3.8%).

Energy resources such as petroleum and natural gas are particularly sensitive to exchange rate increases. This affects not only production costs of other products but also transportation and heating costs, exerting broad upward pressure on overall prices. This, in turn, influences consumption, investment, and fluctuations in exports and imports.

Last month, the consumer price inflation rate re-entered the 2% range at 2.2% after five months. The overlapping rise in international oil prices and the won-dollar exchange rate significantly pushed up petroleum prices, which had a major impact on inflation. The Bank of Korea recently estimated that the exchange rate increase raised the January consumer price inflation rate by about 0.1 percentage points through petroleum prices. Although inflation is expected to slow down temporarily due to base effects from agricultural and petroleum prices, exchange rate volatility remains a factor increasing inflation uncertainty. Analysts say that as long as the high exchange rate situation continues, triggered by tariff wars initiated by former U.S. President Donald Trump and others, inflation rates cannot remain stable as forecasted.

"If exchange rate hits 1500 won, prices could rise up to 7% in three months" ... Warning signs for low growth

The sharp depreciation of the won not only fuels inflation but also diminishes the usual positive effect on exports. The IBK Industrial Bank Research Institute recently analyzed that if the exchange rate rises to 1500 won, consumer prices could increase by up to 7.0% three months later. The exchange rate, which hovered around 1300 won in November last year, surged to the high 1400 won range after political instability such as the December emergency decree, and has recently fluctuated around 1450 won. Jang Han-ik, a research fellow at IBK Industrial Bank Economic Research Institute, said, "The higher the exchange rate level, the greater the inflationary effect. The current exchange rate is already historically high, but the prolonged impeachment political situation and concerns about a downgrade in the country's credit rating have opened the upside."

The conventional wisdom that exporters benefit from a rising exchange rate does not hold under excessive high exchange rate conditions. While exchange rate increases below the 1300 won level clearly boost exports, above that level, a negative relationship occurs. According to the research institute, if the exchange rate rises to the 1500 won range, exports decreased by up to 9.0% nine months later, and manufacturing production dropped by up to 9.3% seven months later.

The market also does not rule out the worst-case scenario where inflation and economic recession occur simultaneously. The high exchange rate pushes prices up, and reduced consumption deepens the pit of low growth. When prices rise due to a soaring exchange rate, consumers have to pay more money than before for a single product, reducing their purchasing power. This decrease negatively affects domestic demand. According to Statistics Korea, retail sales, which represent goods consumption, fell by 2.2% year-on-year last year. This is the largest decline in 21 years since the 2003 credit card crisis (-3.2%).

Experts agree that the depreciation of the won will be one of the biggest variables fueling inflation. Jeong Yong-taek, an economist at IBK Investment & Securities, said, "The January consumer price inflation rate rose again to the 2% range, mainly because the exchange rate rose to the 1400 won level since December last year, pushing up prices of petroleum and processed foods, which have high import dependence. Although the rapidly rising exchange rate does not signify a credit crisis for Korea like the past foreign exchange crisis, it inevitably increases the economic burden." Kim Woong, Deputy Governor of the Bank of Korea, also said at the inflation situation review meeting on the 31st of last month, "The exchange rate will continue to exert upward pressure on prices."