Korea braces for possible stagflation as soaring oil prices fuel inflation, dampen economic growth

Gas prices are on display at a gas station in Seoul, Monday. Yonhap

Korea is facing a growing stagflation threat, as a surge in global oil prices coupled with a weakening currency pushes inflation higher, putting this year’s economic growth outlook of 2 percent under threat, market watchers said Monday.

Stagflation is high inflation combined with slowing growth.

The risk has been intensifying as international crude prices jumped above $100 per barrel for the first time in nearly four years, driven by escalating geopolitical tensions in the Middle East.

Many warn the shock could ripple widely through Asia's fourth-largest economy, which remains highly dependent on imported energy and therefore particularly vulnerable to global commodity price swings.

“The risk of stagflation is rising,” said Lee In-ho, former professor of economics at Seoul National University. “Rising oil prices can also weigh on global trade and disrupt logistics, creating headwinds for Korea’s export-dependent economy. Rising import prices can also shave off the country’s current account surplus.”

At the same time, Lee warned that inflation driven by higher oil prices could weaken consumer sentiment. “If rising living costs dampen household spending, expectations for a recovery in domestic demand and investment may also fade, further slowing growth momentum.”

According to financial market data, April futures for West Texas Intermediate (WTI) rose to $107.54 per barrel on the New York Mercantile Exchange, Sunday (local time), the first time the benchmark has surpassed $100 since July 2022.

For Korea, the impact of higher oil prices can be swift and widespread. The country imports virtually all of its crude oil, meaning domestic prices are extremely sensitive to global energy markets.

Increases in oil prices typically translate quickly into higher fuel and transportation costs, later spreading to broader consumer prices through manufacturing and logistics expenses.

This grim development is further amplified by the local currency's weakness.

The won-dollar exchange rate recently exceeded 1,500 won per dollar in overnight trading, briefly reaching levels seen during the global financial crisis in 2009.

A weaker currency further raises import prices, adding to inflationary pressure already building from higher energy costs.

Although consumer inflation stood at 2 percent in February, economists expect price growth to accelerate beginning in March.

The oil price surge also threatens Korea’s broader economic outlook.

The government’s 2 percent gross domestic product (GDP) growth forecast for this year was based on the assumption that Dubai crude would average about $62 per barrel, far below current levels.

According to the Hyundai Research Institute, if global oil prices average $100 per barrel, Korea’s inflation could rise 1.1 percentage points, while economic growth could fall 0.3 percentage points.

In a more dire scenario where oil prices climb to $150 per barrel, inflation could surge 2.9 percentage points and economic growth could drop 0.8 percentage points, potentially pushing annual growth close to 1 percent.

Economists say Korea’s heavy energy consumption makes it particularly vulnerable to external shocks.

Despite ranking about 12th globally in economic size, Korea is the seventh-largest oil consumer and the highest oil consumer economy relative to GDP among members of the Organization for Economic Cooperation and Development (OECD).