Despite the recent peace agreement between the United States and Iran, inflationary pressures are expected to persist for an extended period. Analysts suggest that the surge in international oil prices following the Middle East conflict will remain elevated, coupled with demand pressures from economic recovery and potential wage increases that could further stimulate inflation.
Shin Hyun-song, Governor of the Bank of Korea, stated during a briefing on June 17 that while the agreement between the U.S. and Iran may reduce risks in the Middle East, there are still significant upward risks to the inflation trajectory. He noted, "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 for the second half of this year will be around 3%, while core inflation is expected to be in the mid-to-late 2% range. The bank also anticipates that both consumer and core inflation rates will exceed the inflation target of 2% next year. Although cost pressures from rising oil prices are expected to gradually ease, demand-side inflation pressures from economic recovery are likely to increase.
In the first half of this year, inflation was significantly impacted by the oil price shock resulting from the Middle East conflict. The consumer price inflation rate exceeded the target level, 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 Middle East 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 elevated at around $80, higher than 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 it unlikely for international oil prices to quickly return to pre-war levels. Furthermore, starting in the second half of the year, the oil price shock is expected to 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 rise in oil prices is prolonged, a 10% increase could lead to a core inflation rise 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 inflation pressures. However, recent improvements in the semiconductor industry have led to wage increases among some large companies, which could further stimulate inflation. Governor Shin remarked, "In addition to cost pressures, we expect demand pressures from domestic economic improvement to gradually increase."
* This article has been translated by AI.
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