[Editorial] Looming Middle East Inflation Shock Must Be Overcome Through Public–Private Unity

There are growing fears of a domino-style inflation shock as the Middle East war drags on. Rising raw material costs driven by high oil prices are set to push up fuel and manufactured goods, and are increasingly likely to spill over into a broad-based surge in everyday food items such as agricultural and livestock products. Major overseas investment banks have recently raised their inflation forecasts for Korea across the board.
The Organisation for Economic Co-operation and Development (OECD) has lowered its growth outlook for Korea this year while sharply revising up its inflation forecast. It now projects inflation at 2.7%, a jump of 0.9 percentage points from its previous estimate. Following this move, global investment banks have been lifting their projections one after another. Barclays, Citigroup, Goldman Sachs and JPMorgan Chase & Co. have all raised their inflation forecasts for Korea this year to above 2%. JPMorgan Chase & Co. has warned that if the Middle East war is prolonged, inflation could exceed 3% after May and remain mired in extreme uncertainty thereafter.
The government is making an all-out effort, including the sudden introduction of a cap on oil prices, but there are clear limits to price control. Inflationary pressure is no longer confined to energy; it is showing signs of spreading across virtually all sectors. According to the March consumer price trends released by the Ministry of Data and Statistics, the energy price index reached 142.89, the highest level since the data series began. The industrial goods index, which is directly affected by energy prices, also hit a record high of 118.80 last month.
The processed food price index has paused thanks to government pressure for factory-gate price cuts, but it will be difficult to keep it in check for long. Oil prices are also being held down by government controls, yet with international crude prices surging back toward the 100-dollar range, it is only a matter of time before domestic prices rise again. The average gasoline price at gas stations nationwide has already climbed to the low 1,900 won range per liter, and it is highly likely to break through 2,000 won soon.
If instability in energy and raw material supplies persists, the shock will spill over into services and agricultural products. Even in the first quarter, when higher fuel surcharges had not yet been reflected, the service price inflation rate was the highest in three quarters. From April onward, when the surcharge hikes are fully passed through, service prices could swing much more sharply. Because these items are highly downward rigid and do not easily fall once they rise, they pose a heavy burden on the economy.
Agricultural prices are under mounting upward pressure from surging international prices of fertilizer feedstocks. Key raw materials for nitrogen-based fertilizers such as urea and ammonia are none other than natural gas. When natural gas prices rise, fertilizer production costs also increase, ultimately driving fertilizer prices sharply higher. If fertilizer prices remain elevated for an extended period, there is ample room for the situation to escalate into a food emergency.
The Strait of Hormuz is not only a key chokepoint for crude oil, but also plays a central role in the production and trade of fertilizers worldwide. Some 25% of global seaborne fertilizer shipments pass through the Strait of Hormuz. Fertilizers lack robust strategic stockpiling systems and are therefore highly vulnerable to supply shocks. It is against this backdrop that the United Nations Conference on Trade and Development (UNCTAD) has warned that fertilizer supply chain disruptions originating in the Middle East could threaten global food security. According to Reuters, the international grain futures price index in the second quarter is expected to jump 6.4% from the previous quarter.
A sharp rise in grain prices pushes up feed costs, which in turn drives up livestock production costs. Prices of processed foods and other food products will climb in tandem. The inflation shock triggered by high oil prices will thus spread across the entire economy. The real problem is that this inflationary shock may only be in its early stages. The government must devise price-stabilization measures that maximize efficiency by sector and by stage. At the same time, companies need to exercise voluntary price discipline, and consumers must embrace more rational spending habits. Just as the nation has overcome past economic crises through the efforts of its people, it must now rally its strength to weather the current high-inflation shock.