Despite a peace agreement between the United States and Iran, inflationary pressures are expected to persist for an extended period. Analysts predict that high international oil prices, which surged following the Middle Eastern conflict, will remain elevated, compounded by demand pressures from economic growth and potential wage increases.
Shin Hyun-song, Governor of the Bank of Korea, stated on June 17 during a briefing on inflation targets, "While the peace agreement between the U.S. and Iran has eased some risks in the Middle East, there are still upward risks to the inflation trajectory. Considering both domestic and external conditions, consumer prices are expected to continue rising at a high level for a considerable time."
The Bank of Korea forecasts that the consumer price inflation rate will be around 3% in the second half of this year, with core inflation projected to be in the mid-to-late 2% range. It also anticipates that both consumer and core inflation rates will exceed the stability target of 2% next year. Although cost pressures from rising oil prices are expected to gradually ease, demand-side inflationary pressures from economic recovery are likely to increase.
In the first half of this year, inflation was significantly impacted by the oil price shock stemming from the Middle Eastern conflict. The consumer price inflation rate exceeded the target level substantially, and the cost of living increased to the mid-3% range, placing a heavier burden on vulnerable households, according to the Bank of Korea.
The primary factor driving inflation has been identified as international oil prices. Brent crude rose from the mid-$60 range in February to over $80 following the outbreak of the conflict, surpassing $100 in May. West Texas Intermediate (WTI) crude also climbed from the $60 range to briefly exceed $110 during the same period. Although the recent peace agreement between the U.S. and Iran has somewhat stabilized the situation in the Middle East, international oil prices remain high at around $80, above pre-war levels.
The Bank of Korea believes that even if the situation in the Middle East stabilizes, it will take time to restore damaged facilities and normalize supply chains, making a rapid return to pre-war oil price levels unlikely. It expects that from the second half of the year, the oil price shock will spread beyond petroleum products to core inflation items.
The rise in international oil prices has direct effects on the prices of petroleum products, but it also leads to indirect effects by increasing production costs and distribution and logistics expenses, impacting prices across industrial goods and services. Additionally, rising inflation expectations contribute to a secondary ripple effect that amplifies inflationary pressures.
According to the Bank of Korea's analysis, if the oil price shock is short-lived, a 10% increase in oil prices would result in only a 0.06% rise in core inflation after five months. However, if the oil price increase persists, a 10% rise could lead to a core inflation increase of over 0.1% after the same period.
Demand expansion due to economic recovery has also been identified as a factor contributing to inflation. The Bank of Korea has previously emphasized supply-side inflationary pressures. However, recent improvements in the semiconductor industry have led to wage increases among some large corporations, which could further stimulate inflation. Governor Shin stated, "In addition to cost pressures, we expect that demand pressures from domestic economic improvement will gradually increase."
* This article has been translated by AI.
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