Middle East war drives oil price surge

International airfares post record 33.5% jump

Everyday price index hits highest in over 2 years

Bank of Korea rate hike odds grow

As the Middle East war drags on, fuel surcharges on international flights ticketed in May have surged to a record high. A Korean Air passenger jet takes off from Incheon Airport. [Yonhap]
As the Middle East war drags on, fuel surcharges on international flights ticketed in May have surged to a record high. A Korean Air passenger jet takes off from Incheon Airport. [Yonhap]

South Korea's consumer prices rose 3.1 percent in May, the highest reading in two years and two months, as a surge in global oil prices driven by the Middle East war pushed petroleum costs to their steepest climb in nearly four years. An index tracking everyday purchases also posted its sharpest increase in over two years, underscoring the growing burden on household budgets.

The Ministry of Statistics said Tuesday the consumer price index stood at 119.92 (base year 2020=100) in May, up 3.1 percent from a year earlier. It was the first time inflation exceeded 3 percent since March 2024, when it also came in at 3.1 percent. After holding steady at 2.0 percent in both January and February this year, the rate climbed to 2.2 percent in March and 2.6 percent in April before jumping 0.5 percentage points within a month to breach the 3 percent threshold.

The surge in global oil prices stemming from the Middle East war dealt a direct blow to overall inflation.

Petroleum product prices rose 24.2 percent, adding 0.92 percentage points to the overall index — the highest rate since July 2022, when prices jumped 35.2 percent in the early months of the Russia-Ukraine war.

Gasoline prices climbed 23.1 percent and diesel 33.3 percent, both marking their largest increases since July 2022, while kerosene rose 21.7 percent, its biggest gain since February 2023.

The ripple effects of higher oil prices spread to travel and accommodation services. Overseas group tour costs rose 26.3 percent and domestic airfares 25.9 percent, partly due to the May holiday period and higher fuel surcharges. Transportation was the fastest-rising spending category, up 11.6 percent. International airfares surged 33.5 percent — the highest increase since the relevant statistics were first compiled in 1995.

Service prices continued to climb. Overall service prices rose 2.8 percent from a year earlier, while personal services gained 3.7 percent. Personal services excluding dining out rose 4.4 percent, accelerating from 3.5 percent the previous month. Dining-out prices held steady at 2.6 percent, unchanged from April.

Agricultural, livestock and fishery prices rose 2.2 percent, reversing three months of declines. Rice jumped 13.5 percent, eggs 10.2 percent and hairtail fish 15.1 percent. The Ministry of Statistics attributed the gains to a base effect from last year compounded by reduced output caused by recent high temperatures. Some vegetables and fruits fell — radishes dropped 27.5 percent, pears 17.8 percent, onions 18.5 percent and cabbage 43.9 percent.

Lee Du-won, a senior statistics official at the ministry, said the impact of the Middle East war did not yet appear to have spread broadly. "Given that the increase in processed food prices is slowing and considering the movement in agricultural and fishery prices, it does not seem like the effects have expanded to other sectors yet," he said, adding that supply-side lags meant the situation warranted close monitoring in the second half of the year.

The everyday price index, which tracks items consumers purchase frequently, rose 3.3 percent from a year earlier — the highest since April 2024, when it stood at 3.6 percent. Food prices rose 2.1 percent, while non-food items climbed 4.2 percent.

The everyday price index including jeonse and monthly rent rose 3.0 percent from a year earlier. Core inflation measures — the index excluding food and energy, and the index excluding agricultural products and petroleum — both rose 2.5 percent year on year.

With consumer price inflation running well above the Bank of Korea's 2 percent target, pressure on monetary policy is mounting. The rise in the everyday price index to 3.3 percent is expected to accelerate discussions about a benchmark interest rate hike.

Bank of Korea Governor Shin Hyun-song said at the Monetary Policy Board meeting on May 28 that the everyday price index "can be assumed to have the most direct influence on inflation expectations," noting it stood at 2.9 percent in April. The remark was widely interpreted as a signal that rising everyday prices could stoke households' inflation expectations.

Economists warned that if the current price pressures spread beyond oil to processed foods, dining out and petrochemical products, inflation could persist longer than expected.

Yang Jun-seok, a professor of economics at Catholic University of Korea, said the sharp rise in oil prices had driven inflation higher, though price caps had limited the increase to some extent. "Even so, the fact that consumer price inflation has exceeded 3 percent is a signal that cannot be taken lightly," he said.

He added that while international oil prices had shown some signs of stabilizing after the third week of May, petrochemical product prices tend to reflect oil costs with a lag, making further increases possible. Higher fertilizer costs could also feed through to agricultural and food prices, he said.

Rising energy prices are pushing up production costs in manufacturing and transportation, while the service sector faces growing pressure from higher labor and operating expenses. If those cost increases are passed on to consumers, a second round of price increases becomes difficult to rule out. Analysts also cautioned that with domestic demand recovery already lagging despite strong exports, consumer and investment sentiment could weaken further.

Kim Jeong-sik, an emeritus professor of economics at Yonsei University, said April producer price gains were likely to feed through to consumer prices in the months ahead, and that this year's consumer price inflation could exceed the Bank of Korea's forecast of 2.7 percent. "If inflation persists, the burden on monetary policy will grow, and that could lead to a slowdown in domestic demand, heavier interest burdens on households and rising delinquency rates," he said.


fact0514@heraldcorp.com