Soaring oil prices stir inflation fears

Supply chain crisis and a spike in raw material cost are driving the global economy into a chaos. Plants are shut down due to lack of parts and oil prices, which rose to $80 per barrel, are holding back the recovery of global economy. Large economies, including the U.S. and China are showing signs of slowdown. This could deal a blow to the Korean economy, which depends heavily on export. If soaring oil prices bring about inflation, domestic demand will inevitably shrink.

West Texas Intermediate (WTI) crude futures hit $80 a barrel for the first time in seven years on Monday (local time), caused by economic recovery from the COVID-19 pandemic and rising demand for heating. As a result, Nordea Bank Finland lowered its forecast for U.S. economic growth next year to 1.5% from 3.5%. This means soaring oil prices will press inflation upwards and reduce consumption. This trend will negatively affect the global economy and Korea’s export.

The supply chain crisis is also worsening. There are difficulties in logistics not to mention bottlenecks in the production of raw materials and intermediate goods. Prices are rising sharply as consumers are not getting products on time. When prices rise, companies normally increase production to sell their products at higher prices. However, under the circumstances, where production itself is difficult, there are concerns of stagflation, which refers to an economy that is experiencing no growth in production and an increase in inflation.

Korea’s consumer price index (CPI) showed an increase of 2% for six consecutive months through September, exceeding the target of 1.8%. Austerity measures, such as rise in interest rates, are necessary to control inflation but this could put a damper on economic recovery. This is why the Bank of Korea (BOK) decided to freeze its key interest rate on Tuesday.

Businesses are operating an emergency system to supply raw materials and parts. The government cannot afford to be complacent on brisk exports. It should take a joint response with businesses to ensure that there are no disruptions in the supply chain, and closely examine soaring oil prices’ impact on electricity cost. Another difficult challenge is establishing a meticulous interest rate policy, considering both prices and the economy. The current situation worldwide is too urgent for the government to just sit back and observe it.