Volatility in oil prices, currency add pressure on Korean economy

South Korea's import prices climbed for a third consecutive month, increasing inflationary pressure on the economy, central bank data showed Wednesday. Export prices rose as well, but at a slower pace.

The import price index for September stood at 139.67, up 2.9 percent from a month before. The figure has been on the rise for three straight months, following 4.2 percent and 0.2 percent increases in August and July, respectively, according to preliminary data from the Bank of Korea.

The figures showed that prices of Dubai crude, Korea's benchmark, climbed from $86.46 per barrel in August to $93.25 in September, marking 7.9 percent growth prior to the conflict between Israel and Hamas militants.

Along with the surge in oil prices, the import prices of raw materials rose 5.7 percent, largely owing to gains from minerals, while those for intermediate goods, including coal and petroleum products, advanced 2 percent.

The surge in international oil prices is expected to accelerate, owing to recently heightened tensions in the Middle East.

“The oil prices have been fluctuating after a sharp increase following the outbreak of the war. For now, we need to wait and see,” BOK official Yu Seong-wuk said at a press briefing Monday. “As there are numerous variables (related to inflation) such as the currency, it is hard to say how the situation will develop.”

The currency rate has also not been in favor of the Korean economy.

The average won-dollar exchange rate was 1,329.47 won per dollar in September, 0.8 percent higher than 1,318.47 won in August, showing that the Korean won has weakened against the US dollar. The won-dollar exchange closed at 1,353.6 won on Tuesday.

The export price index also rose 1.7 percent in September, standing at 119.56. The figure has been on the rise for three consecutive months dating to July, after dipping in May and June. Yet the increase in import prices is sharper, outpacing the rise in export prices.

With higher import prices due to oil and currency, Korea is bracing for another wave of inflation. Higher prices of raw materials and intermediate goods lead to higher production costs, affecting consumer prices.

Korea’s consumer prices, a major gauge of inflation, have been increasing at a faster-than-expected pace, rising by 3.7 percent on-year in September, following 3.4 percent growth in August. The figure has been on a continuous rise since hitting a low of 2.3 percent in July.

Under such circumstances, Korean authorities are keeping a close eye on prices, as higher oil prices from the Israel-Hamas conflict could lead to further inflationary risks for the Korean economy, which is heavily dependent on energy imports.

“The uncertainty of higher prices has strengthened, following the fluctuation of international oil prices due to the Israel-Hamas conflict,” Finance Minister Choo Kyung-ho said at a governmental meeting held Tuesday.

At the meeting, Choo announced measures to offer discounts on agricultural products to tame inflation.

“The cut on the fuel tax and related subsidies will be maintained until the end of this year. An intergovernmental team for inspection on the ground will be formed so that there will not be price hikes that ride on the volatility of the international oil market,” Choo said.

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