KDI: Prolonged High Oil Prices Could Raise Next Year’s Inflation by 1.8 Percentage Points

\r\n
[Financial News] A study has found that if high oil prices persist, they could push next year’s consumer inflation rate up by as much as 1.8 percentage points. The report also said the recent rise in oil prices is driven by uncertainty over energy transport, which could have a broader impact on overall inflation.
On the 11th, the Korea Development Institute (KDI) released a report titled "The Impact of Rising International Oil Prices on Consumer Prices."
KDI said that higher global oil prices caused by transport uncertainty have a stronger effect on domestic petroleum product prices. If international oil prices rise 10%, domestic petroleum product prices increase by 2.69 percentage points due to transport uncertainty, about 30% higher than the 2.00 percentage-point rise caused by ordinary factors.
The impact on consumer prices and core inflation was also larger. KDI found that a rise in international oil prices driven by transport uncertainty lifts consumer inflation by 0.20 percentage points, nearly twice the 0.11 percentage-point effect of a typical oil price increase. In particular, while ordinary oil price increases have a limited effect on core inflation, oil price gains caused by transport uncertainty were found to raise core inflation by 0.10 percentage points.
Ma Chang-seok, a senior researcher at KDI, explained, "As transport uncertainty grows, global refiners begin building precautionary inventories, which can cause petroleum product prices to react more sharply than actual supply and demand conditions would justify." He added, "As companies pass higher costs on to industrial goods and service prices, the impact spreads to core inflation."
KDI presented three scenarios for future international oil prices: a baseline case, a prolonged high-price case, and a price stabilization case. Under the prolonged high-price scenario, Dubai crude is assumed to stay at around $105 per barrel through the end of the year. In that case, its contribution to consumer inflation could rise to 1.6 percentage points this year and 1.8 percentage points next year.
Under the baseline scenario, Dubai crude is assumed to peak at $100 per barrel in the second quarter of this year before gradually declining. In that case, its contribution to consumer inflation is estimated at 1.2 percentage points this year and 0.9 percentage points next year. The analysis did not reflect the government’s fuel tax cuts or the effects of the cap on maximum oil prices.
KDI said policy responses should be tailored to the source of oil price increases, as their impact on inflation and the scope of spillovers can vary. It also stressed that policy should take into account signs that inflation expectations are recently rising.
Ma said, "Normally, higher international oil prices tend to have a temporary effect on the prices of some items, but the degree of inflation and the scope of spillovers can differ depending on the cause of the increase." He added, "Policy should be managed with the possibility in mind that prolonged oil price increases could destabilize inflation expectations."
hippo@fnnews.com Kim Chan-mi Reporter