Food inflation may be brewing as the dollar–won rate stays at crisis levels

Kalguksu Getty Images Bank — Kalguksu/ Getty Images Bank

SEOUL, November 24 (AJP) - Kalguksu, flour dough cut by knife into noodles and served in a steamy broth, is one of the cheapest comfort meals for Korean office workers on cold winter days. But even this humble bowl is no longer cheap. A serving now averages 9,846 won ($7), up 5 percent from a year ago and more than 50 percent from a decade earlier.

It is the latest addition to Korea's growing list of food-flation items, as the soaring dollar–won exchange rate raises the cost of imported ingredients and, eventually, finished products that reach shelves and restaurant tables.

The U.S. dollar rose 4.50 won to 1,476.5 on Monday, despite the finance ministry's move to form an emergency FX council with the Bank of Korea and the National Pension Service. The NPS, the country's largest institutional investor, is also one of the biggest structural sellers of won due to its massive U.S. equity holdings.

The won has averaged 1,453.9 this month, up 4.6 percent from August, pointing to stronger import-driven inflation pressure heading into the fourth quarter.

Headline inflation rose 2.4 percent on-year in October, but pressure was stronger in key categories. Processed foods climbed 3.5 percent, petroleum products 4.8 percent, and dining-out prices 3.0 percent. Economists estimate that a 1 percent increase in the exchange rate typically adds 0.06 percentage point to consumer inflation.

Flour prices illustrate the trend. The flour consumer price index jumped from 108.47 in December 2021 to 138.17 in December 2022 after Russia invaded Ukraine. It has since hovered in the 130 range, recording 137.59 in December 2023, 137.43 in December 2024 and 135.33 last month.

Some food ingredients have eased since the Ukraine-related spikes. According to the Korea Agro-Fisheries & Food Trade Corporation, cocoa prices fell 41.38 percent from a year earlier to $5,084 per ton on Nov. 21. Raw sugar dropped 39.68 percent, milk 10 percent, wheat 3.57 percent and oats 16.79 percent over the same period.

But others remain elevated. Soybeans traded around $412.27 per ton in November, up 12.27 percent from a year ago. Barley edged up 0.49 percent, tapioca starch rose 4.6 percent and Arabica coffee prices climbed 10.48 percent.

Because Korea depends heavily on imported inputs, these global price trends pass quickly into local supply chains. Domestic food manufacturers used only 31.9 percent domestic ingredients in 2023, meaning roughly 70 percent of raw materials such as wheat, soybeans, corn, palm oil and raw sugar were sourced from overseas.

Producer prices rose 0.2 percent month-on-month in October to 120.82, marking the second straight monthly increase. Import prices, based on the domestic supply price index, climbed to their highest level in 18 months.

Household burdens are rising in fuel as well. Nationwide gasoline prices jumped 25.8 won per liter in the third week of November. Seoul posted the highest average at 1,799.1 won per liter, while Daegu averaged 1,706.5 won.

International oil markets showed mixed movements. Dubai crude, Korea's benchmark, inched down 0.3 dollar to $64.6 per barrel, while international gasoline prices fell 1.4 dollars to $78.8.

The Korea National Oil Corporation said global oil prices eased as the United States proposed a draft peace plan to end the Russia–Ukraine war and markets grew more confident that the Federal Reserve may skip a rate cut in December. However, it warned that domestic pump prices are likely to keep rising due to persistent exchange-rate pressure, despite softer crude.

"Import prices no longer work as a double-edged sword as they used to. With the economy essentially running on low blood pressure, interest rates lower than the U.S., and excessive liquidity through vouchers, inflation is now fueled by a weak currency," said Cho Dong-geun, professor emeritus of economics at Myongji University.

Kim Dong-young davekim0807@ajupress.com