Korea faces mounting inflationary pressure from Middle East conflict

Seasonal vegetables are displayed at a supermarket in Seoul, Thursday. Yonhap

Korea is facing growing inflationary pressure across the board from soaring oil prices as the Middle East conflict shows little sign of easing and the Strait of Hormuz remains effectively choked off, government data showed Sunday.

According to the Ministry of Data and Statistics, the country’s overall consumer price index stood at 118.80 in March, up 2.2 percent from a year earlier. But energy prices jumped 5.2 percent, the sharpest increase since January 2015, as diesel spiked 17 percent, kerosene rose 10.5 percent, petroleum 9.9 percent and gasoline 8 percent.

In addition, the services price index reached 115.96 in the first quarter of the year, rising 2.4 percent year-on-year, the fastest increase in three quarters. Within the services category, personal services such as dining out rose 3.2 percent, extending their run above the 3 percent mark to a fifth consecutive quarter. International airfares increased 2.3 percent.

The concern is that these figures have yet to fully reflect the impact of global oil price hikes driven by supply disruptions, with the real impact of the Middle East conflict expected in the coming months, according to economists.

“An increase of around 2.4 percent isn’t unusual in itself; prices typically rise by about 2 percent under normal conditions. What’s important, though, is that the latest figures don’t yet reflect the full range of inflationary pressures stemming from the Middle East conflict,” said Jeong Se-eun, a professor of economics at Chungnam National University.

“Delivery riders, transport operators, taxi drivers — they are all absorbing the rise in fuel costs for now. But eventually, delivery fees and transport costs will have to go up across the board.”

Major carriers such as Korean Air and Asiana Airlines have increased fuel surcharges for April by up to 3.5 times compared with March — a move expected to lift international airfares by up to 15 percent, according to Korea Investment & Securities.

If oil prices stay elevated, the impact is likely to extend well beyond airfares. A tight crude supply drives up logistics and transportation costs, which are then passed on to consumers through higher prices for services such as dining and accommodation, while also exerting pressure on retail goods.

Because service prices tend to stick once they rise, what begins as a cost shock risks hardening into more sustained and entrenched inflation.

Agricultural and livestock prices, which fell 2.1 percent in the first quarter from a year earlier amid government measures to stabilize food costs, could also escalate in the coming months.

Farmers are now entering the spring planting season, when demand rises for fuel, plastics and fertilizers. The current disruption in the supply of naphtha — a key petrochemical feedstock derived from crude oil and used to produce plastic bags and various other products — could begin to feed into skyrocketing agricultural prices in the summer months.

“The government is trying to contain prices through measures like fuel tax cuts and price caps, but oil isn’t just a fuel; it is also a key raw material. If shortages of plastics persist for several months, producers will have little choice but to turn to more expensive alternatives. Electricity may be less directly affected, but given the reliance on fuels like liquefied natural gas, utility costs could rise as well,” the professor said.

Jeong added that China, which accounts for a large share of global fertilizer production, has now curbed exports. “This raises the risk of a broader food supply shock. It really underscores just how dependent we are on crude oil from the Middle East. If this drags on, it could trigger a disruption unlike anything we saw during the COVID-19 pandemic.”

Major global investment banks have revised up their inflation outlooks for Korea. Eight firms now expect consumer inflation to average 2.4 percent this year, up from the 2 percent they predicted at the end of February.

JPMorgan Chase, which forecasts inflation of around 2.6 percent in April, said in a report that the energy price shock stemming from the Middle East crisis has not been fully reflected in the data. It added that unless the geopolitical situation improves meaningfully, inflation is likely to exceed 3 percent between May and September.