Korea's inflation woes grow as heat wave drives up food prices

Fishers clear dead stock from a fish farm in Taean, South Chungcheong Province, Thursday, amid high water temperatures. Yonhap

This summer’s prolonged heat wave is pushing up food prices, raising the prospect that a rebound in inflation could be more pronounced than expected in August, according to economists, Sunday.

The concern comes as underlying price pressures remain firm, with core inflation picking up in July. Meanwhile, the government’s oil price cap, which has remained in place since March shortly after the U.S. and Israel began their war on Iran, is another variable clouding the outlook.

Taken together, the result is a more challenging inflation picture, with a weather-driven supply shock adding to pressures that were already building beneath the surface.

According to the Ministry of Data and Statistics, July consumer inflation eased to 2.8 percent, falling back into the 2 percent range for the first time in three months. One of the biggest wild cards for August, however, is the severe heat wave that has gripped the country this summer, with temperatures topping 40 degrees Celsius in some areas, including parts of Seoul.

The extreme heat has hit supplies of everything from vegetables to meat and seafood. with shipments disrupted and shelf life shortened, according to the Korea Agro-Fisheries & Food Trade Corp.

The retail price of spinach stood at 1,978 won per 100 grams, up 152.3 percent from the previous month. The price of 10 cucumbers rose 54.8 percent over the same period, while a single zucchini climbed 46.6 percent to 1,504 won.

The weather is also taking a toll on livestock and farmed fish. As of Friday, more than 901,000 livestock deaths had been reported, along with over 864,000 farmed fish deaths caused by high water temperatures. While these losses have yet to translate into significant price increases, a prolonged heat wave could add to volatility in the weeks ahead.

“Food prices tend to be vulnerable to seasonal weather conditions such as typhoons in the summer, but this year’s extreme heat is making the rise in prices for agricultural and fishery products particularly noticeable to consumers,” said Kang Sung-jin, an economics professor at Korea University.

“These are everyday necessities, and demand for some tends to pick up during the summer. That makes them especially sensitive to supply disruptions, and this year’s extreme weather is only adding another layer of pressure,” he said.

Yang Jun-sok, an economics professor at the Catholic University of Korea, also warned of growing risks for fruit prices ahead of the Chuseok holiday in September, as extreme heat can reduce both yields and quality.

“Strong sunlight, for example, can reduce its marketability. If the heat wave persists, supplies of premium-grade fruit available for shipment could fall, while demand ahead of Chuseok could add to price volatility,” he said.

A vendor sets out produce for sale at Gyeongdong Market in northeastern Seoul, Thursday, as vegetable prices surge amid a prolonged heat wave. Yonhap

Underlying price pressures

The weather-driven supply shock is unfolding alongside signs that underlying inflationary pressures are proving sticky.

Core inflation rose from 2.5 percent in June to 2.6 percent in July, marking its biggest monthly increase since December 2023. The figure is closely watched because it strips out temporary swings in food and energy prices and offers a clearer gauge of more persistent price pressures.

At the same time, economists warn that the government’s current oil price cap could complicate efforts to bring inflation under control over the longer term.

The cap has shielded consumers from the full impact of higher global oil prices since it was introduced in March. But Kang noted that this does not mean the underlying cost increase has disappeared. Much of the rise in global oil prices has effectively been absorbed by the policy, meaning “the inflationary pressure has been suppressed rather than eliminated.”

Yang also said the longer the government keeps fuel prices artificially low, the more it risks distorting the market signals that normally help balance demand and supply.

“It is a typical policy of sacrificing the future to win votes today,” he added, warning that prolonged price controls could ultimately slow efforts to reduce Korea’s energy consumption and imports, which would leave the economy more vulnerable to future oil price shocks and their inflationary impact.

Taken together, these pressures could push consumer inflation back into the 3 percent range in August and beyond.

And if inflation rebounds as expected, the reading could also strengthen the case for the Bank of Korea to consider another rate hike at its policy meeting scheduled for Aug. 27, according to Ahn Jae-kyun, an analyst ⁠at Korea Investment & Securities.