China’s rising raw material costs are driving up the prices of consumer goods in South Korea, said the Bank of Korea.
According to a Yonhap News Agency report citing the Bank of Korea, China’s soaring producer price index and export prices driven by its rising raw material costs are adding to South Korea’s inflation pressures, reflecting on its consumer price index (CPI).
Producer price index (PPI) and consumer price index (CPI) are economic indicators that measure inflation. PPI measures inflation from the producer’s perspective, reflecting the price changes at the production end, whereas CPI measures the total value of goods and services consumers have bought over a specified period, reflecting the price changes passed on to the end consumer. The two are interrelated as the fluctuation of PPI will be transmitted to CPI.
China remains South Korea’s largest trading partner in both imports and exports. According to World Bank, more than 21 percent of South Korea’s imports come from China.
South Korea’s imports from China could come from direct and indirect paths. The direct path refers to consumer goods that are imported straight from China. Indirect paths include importing goods produced by third-party countries—such as ASEAN countries—or goods produced domestically in South Korea using intermediate goods from China. However, the indirect paths account for 57 percent of its Chinese imports.
South Korea’s consumer price index (CPI) is also largely affected by imports from Indonesia, Thailand, Vietnam, the Philippines, and Malaysia—ASEAN countries that rely heavily on China for intermediate goods. Any increase in China’s export prices to these countries will eventually be passed to South Korea’s consumer prices and reflect on its CPI.
In November 2021, South Korea’s CPI rose by 3.7 percent year on year, of which 1 percent was from consumer goods items from the five ASEAN countries—more than triple the beginning of 2021, according to Newsis, a South Korean news agency.
However, the South Korean central bank said it expects further inflation because many of the imported goods from China and the five ASEAN countries are daily necessities.
The surge in China’s export prices was due to its rising PPI. In October 2021, China’s PPI saw the highest recorded increase of 13.5 percent year-on-year. In November 2021, South Korea’s import unit value from China rose by 22.7 percent year-on-year—the highest since 2007, according to the Bank of Korea calculations.
In particular, the prices of intermediate goods, including raw materials, from China will also affect South Korea’s PPI.
For example, China’s price surge in raw materials such as crude oil and iron ore has transmitted to South Korea’s rising PPI in chemicals and metal products. And price hikes in Chinese imports of semiconductor-related materials and display panels have transmitted to South Korea’s rising PPI in electronics and optical products.
Urea and fertilizer prices were also affected by China’s surging coal and natural gas prices, resulting in a major rise in logistics costs and agricultural prices in South Korea.
However, South Korean automobiles and home appliances that use Chinese intermediate goods have yet to see a significant rise in CPI. According to the Bank of Korea report, it is likely due to the long and complicated process of transmitting the cost rise in intermediate goods to the final products, among factors such as complex tax and market regulations.
The report also indicated a significant inflation pressure in South Korea. Much of the price hike in Chinese-imported goods has yet to fully reflect on the domestic consumer prices, putting a burden on many South Korean companies and industries.
According to a Yonhap News report citing Statistics Korea, consumer prices were up 2.5 percent in 2021 compared to 2020, the highest increase in 10 years. And the fastest CPI surges happened in the last three months of 2021, where the year-on-year increases of October, November, and December were 3.2 percent, 3.8 percent, and 3.7 percent, respectively.