Naphtha prices down 23%, but snack prices haven't budged — the hidden lag in inflation

Vegetables and other produce are displayed at a hypermarket in Seoul. [Yonhap]

When global oil prices fall, it might seem like the cost of oil-derived products would drop right away — but reality works differently. It takes time for raw material prices to work their way through production costs and wholesale prices before reaching consumers.

That is why a slowdown in producer price inflation — even after a drop in oil prices — offers little reassurance about consumer prices. The so-called secondary ripple effect, in which earlier increases in raw material costs feed belatedly into the prices of other goods and services, is still playing out.

According to the Bank of Korea's preliminary producer price index data for June 2026, released Wednesday, producer prices held flat last month compared with May. After rising continuously since September last year, when they climbed 0.4 percent, producer prices came to a standstill for the first time in 10 months.

The picture varied widely by category. A sharp drop in oil prices pulled down petroleum-related products: naphtha and jet fuel fell 23.5 percent and 23.4 percent respectively, dragging coal and petroleum products down 5.3 percent overall, while chemical products — including ethylene, down 18.9 percent, and polyethylene resin, down 10.2 percent — declined 1.8 percent. Agricultural, forestry and fishery products rose 0.7 percent, however, electricity, gas, water and waste services climbed 1 percent, and other services edged up 0.2 percent.

The producer price index measures the price level of goods sold by producers such as manufacturers and suppliers. It covers all goods and services produced domestically and released into the domestic market — in short, the prices businesses charge one another. That makes it distinct from the consumer price index, which tracks what individual buyers pay at the point of purchase.

By its nature, the producer price index tends to move earlier than the consumer price index. When naphtha prices rise, for instance, producer prices go up, but consumer prices are not immediately affected. Over time, however, higher naphtha costs push up prices for chemicals such as ethylene, which in turn can raise the cost of packaging materials. When the price of snacks using those materials eventually rises, consumer prices follow. The lag between the two indicators is typically two to three months.

Other variables also play a role, including the structure of supply contracts and how producers set prices. Most raw material supply agreements lock in prices on a quarterly or semi-annual basis, meaning a drop in input costs this month does not automatically translate into a lower wholesale price this month — producers must wait until the next contract renewal. Passing higher costs on to consumers can also take additional time.

A secondary ripple effect — in which categories beyond oil are gradually becoming more expensive — is also at work. The secondary ripple effect refers to the way a price increase in one part of the economy sets off a chain reaction in others, much like a row of falling dominoes. When crude oil prices rise, shipping costs follow. Even if crude prices later fall, upward pressure on transport costs can offset the relief.

A similar pattern appeared in June's producer price data. Virtually all categories outside petroleum and chemical products rose. The overall producer price index may have been flat, but upward and downward pressures are evenly matched beneath the surface.

Lee Moon-hee, head of the Bank of Korea's price statistics team, said that while the month-on-month rise in producer prices had stopped, secondary ripple effects from the Middle East war appeared to be continuing and would act as an upward factor on consumer prices for now.

Lee added that the non-energy component of the special classification index was flat month-on-month but maintained an 8.2 percent year-on-year gain in June, matching the pace seen in May. "Price increases in oil and raw materials following the Middle East war have been feeding through with a lag, keeping non-energy items well above year-ago levels — and that is acting as an upward factor," he said. In other words, even stripping out energy, prices are more than 8 percent higher than a year ago.

Producer prices are expected to face continued upward pressure in July, driven mainly by secondary ripple effects. Lee noted that Dubai crude prices averaged about 10 percent below June levels from July 1 to Monday, and that fuel surcharges on air cargo and passenger services had been reduced. At the same time, he cited upward risks including a resumption of armed conflict between the United States and Iran and a planned increase in wholesale industrial city gas rates. "Upward and downward factors are mixed," he said. "The overall direction will need to be assessed once all the data are in."

kimstar@heraldcorp.com