December Inflation Rate at 1.9%... Oil Prices Rise Due to High Exchange Rates

In December, the consumer price index rose by 1.9% compared to a year ago, marking a 1% increase for the fourth consecutive month. However, due to the impact of the strong dollar and the rise in exchange rates following the martial law, oil prices have turned upward, increasing the rate to the high 1% range.

According to the 'December and Annual Consumer Price Trends' released by Statistics Korea on the 31st, the consumer price index in December rose by 1.9% compared to last December. It has been in the 1% range for four consecutive months since September (1.6%).

This year, the inflation rate showed a trend of overall downward stabilization. After peaking at 3.1% in February and March, it slowed to the 2% range from April to August. In September, it fell to 1.6%, recording the lowest rate in three years and seven months. It continued in the mid-1% range in October (1.3%) and November (1.5%), but jumped to near 2% this month.

The slight rise in this month's inflation rate is analyzed to be due to the increase in oil prices caused by the rise in exchange rates. High exchange rates drive up the prices of imported raw materials, including oil, stimulating overall prices. In December, oil prices rose by 1.0% compared to the same month last year, turning upward for the first time in four months. Until last month, oil prices had fallen by 5.3% compared to the same month last year, contributing to lowering the overall price by 0.22 percentage points. Gong Mi-sook, director of economic trend statistics at Statistics Korea, explained, "Oil prices rose due to the impact of exchange rates, the base effect from last year's decline, and changes in fuel tax reduction rates."

The increase in agricultural product prices also widened. Due to the heatwave, the prices of winter fruits such as tangerines rose, causing the agricultural product price increase rate, which was only 0.3% last month, to jump to 2.6% this month. The price increase for processed foods (2.0%) also expanded compared to the previous month (1.3%) as the shipping prices of some items such as bread and coffee increased.

The overall inflation rate for this year was recorded at 2.3%. It is the lowest level in four years since 2020 (0.5%), the first year of COVID-19. The inflation rate, which hit 5.1% in 2022, slowed to 3.6% last year and 2.3% this year, approaching the Bank of Korea's inflation stability target (2%).

However, this year was particularly expensive for agricultural products. Due to poor harvests caused by the heatwave, agricultural product prices rose by 10.4% compared to last year. It is the largest increase in 14 years since 2010 (13.5%). Notably, the price increase rates for apples and pears reached 30.2% and 71.9%, respectively. The price of cabbage also rose by 25.0% compared to last year.

There are observations that next month's inflation rate will rise further due to the impact of the high exchange rates following the recent martial law situation. Kim Woong, deputy governor of the Bank of Korea, said at the 'Price Situation Review Meeting' today, "There is a possibility that next month's inflation rate will rise further due to the recent high exchange rates." He predicted that the inflation stability trend would continue below 2% for the time being due to the base effects of oil and agricultural product prices.

Heo Semin, reporter semin@hankyung.com