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Global oil price surge stokes stagflation concerns

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A signboard at a gas station in Seoul shows gasoline priced at 1,948 won ($1.47) per liter, diesel priced at 1,878 won and premium gasoline at 2,295 won, Tuesday. Yonhap
A signboard at a gas station in Seoul shows gasoline priced at 1,948 won ($1.47) per liter, diesel priced at 1,878 won and premium gasoline at 2,295 won, Tuesday. Yonhap

By Yi Whan-woo

Global oil prices are surging toward $100 a barrel again as witnessed when Russia began its invasion of Ukraine in February 2022, stoking concerns that increasing prices will seriously dampen any cooling trajectory for inflation in Korea and the possibility of further stagflation.

The increasing oil prices are also subsequently raising speculation that the Bank of Korea (BOK) may return to hiking the key interest rate to tame consumer inflation.

The BOK has kept its benchmark interest rate steady at 3.5 percent since January.

According to Korea National Oil Corp.'s Opinet website, Wednesday, the prices of three crude oil benchmarks ― Dubai, Brent and West Texas Intermediate (WTI) ― are creeping higher above $90 per barrel this month, after staying between $70 and $80 since November 2022.

For instance, Dubai set a new annual high at $95.56, Friday, while Brent and WTI also advanced to their respective new highs ― $94.43 and $91.48 ― on Monday.

Oil prices, according to market observers, have increased by almost 30 percent since June, due mainly to Russia and Saudi Arabia's oil production cuts.

Some observers speculate the prices could exceed $100 before year-end.

As prices increase, the BOK announced, Wednesday, that the producer price index reached 121.16 in August, up from 120.08 in July.

The 0.9 percent month-on-month increase is the sharpest since a 1.6 percent rise in April 2022. The increase has been driven by price hikes in crude oil and weather-sensitive agricultural goods following heavy rainfall in July, according to the BOK.

"The increase in production costs can be a warning of the return of high consumer inflation, as producers inevitably will need to sell their goods at higher prices to make a profit," said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI).

He noted that gasoline prices have been rising for more than two weeks, averaging 1,776.84 won per liter, Tuesday.

"The price increase may be extreme for other goods and services from energy-intensive industries," the KERI economist said.

As the high oil price pulls up consumer prices, concern is growing over possible stagflation, where rising inflation is coupled with weakening economic growth. Sluggish global demand following price hikes may further dampen recovery of Korea's manufacturing sector, which has been sustaining exports.

Lee also pointed out that the high oil prices could lead to key rate hikes. "The BOK may consider resuming rate hikes if the oil price spike does not let up," he said.

Speaking on condition of anonymity, a Hana Bank analyst said the signs of a possible rebound in inflation were seen in August when consumer price growth surpassed 3 percent after staying in the 2 percent range for the previous two months.

Consumer prices rose 3.4 percent in August from a year earlier, compared to a 2.7 percent year-on-year increase in June and a 2.3 percent year-on-year increase in July.

In particular, July's consumer inflation marked a 25-month low.

"I think such a possible re-increase in inflation will be short-lived as there are more than oil prices that determine upward inflationary pressure," the analyst said. "But even so, the possibility of a rate hike should not be ruled out if the oil price breaches $100."

Yi Whan-woo


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