Rising production costs add to consumer inflation concerns

Fresh produce is displayed at a supermarket in Seoul, Tuesday, as production costs for consumer goods rise on the back of volatile oil prices. Yonhap

Producer prices in Korea increased for the third consecutive month in September amid global oil market volatility, data showed, Tuesday.

The Bank of Korea (BOK) data is prompting speculation that the upward trajectory in production costs will steepen given the data does not account for the Israel-Hamas war that started Oct. 7.

The war, according to market observers, could further rattle oil prices if it widens to other Middle East countries.

Producer prices are used as a barometer for consumer inflation as increases in production costs are passed on to consumers.

Correspondingly, the September data is also leading speculation that the pace of consumer price rises will continue to accelerate after advancing for the second straight month in September.

According to the BOK, the producer price index was measured at 121.67 in September, up 0.4 percent from a month earlier.

The finding came after the index inched down 0.2 percent month-on-month in June and then advanced 0.3 percent in July and again 0.9 percent in August.

 

“The pace of growth in producer prices slowed down between August and September, but it could surge again considering the Israel-Hamas war is getting more intense,” said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI).

He noted the price of benchmark Dubai was easing to a range of $80 per barrel after setting a new annual high at $96.75 in late September.

The price has been re-surging following the break out of the war and is now back again in the $90 range per barrel, hitting $92.34 on Monday.

Joo Won, deputy director of Hyundai Research Institute, speculated the Israel-Hamas conflict could add to volatile oil prices and relevant producer prices.

For instance, the cost of production last month went up 6.6 percent for petroleum products, 1.5 percent for chemical productions and 14.6 percent for residential electricity.

“It is anybody’s guess that the businesses will charge consumers with higher prices to reap profits and that consumer prices will go up,” Joo said.

Consumer inflation, after softening to a 25-month low of 2.3 percent in July, gained 3.4 percent in August and then 3.7 percent.

The BOK predicted last week that it will take a longer time for inflation to ease to the target rate of 2 percent, although core inflation is also projected to continue slowing.

Against this backdrop, a senior BOK official said the central bank “will closely keep track of the development of the Israel-Hamas war and its impact on producer prices.”