The United States and Iran have reached a cease-fire deal, but prices are not expected to fall for the time being. A Bank of Korea (BOK) official said in a phone call with ChosunBiz on the 16th, "It won't be much different from the inflation outlook at the end of May." The BOK's outlook at the end of May projects this year's consumer price inflation at 2.7%. That is higher than the BOK's inflation target of 2%.
Experts say future prices hinge on international oil prices and the benchmark interest rate. A similar situation unfolded during the Ukraine war.
◇ Ukraine war-driven inflation rose in five months and took nine months to fall
During the 2022 Ukraine war, the surge in international oil prices was the starting point of global high inflation. West Texas Intermediate (WTI) futures jumped from $90 per barrel at the end of February to $119.65 on Mar. 8, about three weeks into the war. It took about seven months to return to the $90 level, reaching $89.03 on Aug. 31.
Prices moved more slowly than that. The consumer price inflation rate rose from 3.8% in February to a peak of 6.3% in July. It then turned downward and returned to its previous level in April 2023 (3.7%). In other words, it spiked in five months after the war, but took nine months to come down.
Analysts say the subsequent price stabilization came as crude prices fell and interest rates were raised. The world also tightened liquidity to rein in prices that had surged due to an "energy shock." Notably, the United States lifted rates from 0.25% per year to 5.5% by August, right after the war. The Bank of Korea (BOK) raised its rate from 0.5% to 3.5% from August 2021 to January 2023.
◇ Timing of oil price decline hard to predict… Some argue for responding with rate hikes
The current Middle East war has also pushed up prices worldwide. Christine Lagarde, president of the European Central Bank (ECB), said in an interview with a media outlet, "We are starting to see almost all sectors affected indirectly by recent inflation," and added, "If inflation comes back, it must be contained." The European Central Bank on the 11th raised the deposit rate from 2% to 2.25%.
Future prices are expected to depend on oil and interest rates. Opinions are divided on the direction of oil prices because it depends on how quickly destroyed oil production facilities can be restored. It is also unclear when the Strait of Hormuz will return to normal. A Bank of Korea (BOK) official said, "If the strait reopens, that would be positive, but it could take time to remove mines near the strait and restore storage facilities," adding, "Experts say different things."
Consumer prices in May came in at 3.1%, the highest in 26 months. The Bank of Korea (BOK) estimated that if the Middle East fallout subsides early, consumer prices would be 2.5% this year, 0.2 percentage point below the outlook, and 2% next year, 0.3 percentage point lower. In a pessimistic scenario in which the Middle East situation is prolonged, it expects 3% this year and 2.8% next year.
Seok Byung-hoon, a professor of economics at Ewha Womans University, said, "Even if the war ends, it won't be possible to immediately ramp up oil production, so it's hard to see oil prices falling," adding, "Prices will not automatically stabilize until the benchmark rate is raised above 3%."