South Korean producer prices fell for the first time in 11 months in July, as declining international oil prices dragged down petroleum and chemical products. A drop in brokerage commissions amid a stock market correction also weighed on the index. Against this backdrop, the Bank of Korea's new deputy governor said ahead of next week's rate decision that monetary policy would be set flexibly, taking into account the side effects of rate increases. Analysts said the slowdown in price gains has somewhat lowered the likelihood of a consecutive hike following last month's increase.
According to preliminary July producer price data released by the Bank of Korea on the 21st, the producer price index stood at 129.39 (2020=100), down 0.4% from the previous month. The index had risen for nine consecutive months after August last year, when it fell 0.1%, before holding steady in June and turning lower in July. Compared with a year earlier, it rose 7.7%, a smaller gain than June's 8.5% increase. Producer prices, which can be viewed as a form of wholesale prices, typically feed through to consumer prices one to three months later.
Falling international oil prices pulled coal and petroleum products down 5.1% and chemical products down 1.3%, dragging the overall index lower. The average monthly price of Dubai crude fell 3.4%, from $79.45 a barrel in June to $76.75 in July.
By item, diesel fell 9.8%, while gasoline dropped 11.3%, polyethylene resin 10.2% and silver ingots 14.0%. Residential electricity also fell 11.8%, helped by an easing of summer tiered-pricing brackets. Brokerage commissions dropped 16.8% amid last month's stock declines. Such commissions are calculated by multiplying the value of underlying-asset trades by a fee rate, so when stock prices fall, trading values tend to shrink and commissions decline with them.
Domestic prices have slowed somewhat from the sharp increases seen in the first half of the year, which were driven by the fallout from the Middle East conflict. The July consumer price index rose 2.8% from a year earlier, a smaller gain than in May, when it rose 3.1%, and June, when it rose 3.2%. In the July consumer sentiment survey, the one-year expected inflation rate also fell 0.1 percentage point from the previous month to 2.7%.
Attention is now turning to the rate decision at next week's meeting of the Bank of Korea's Monetary Policy Board. The central bank, which raised the base rate by 0.25 percentage point to 2.75% from 2.5% on the 16th of last month — its first increase in three and a half years — had been widely expected to raise rates again this month. But with the recent slowdown in price gains, the won-dollar exchange rate falling into the 1,300-won range, weak employment and K-shaped polarized growth, the view that the bank will wait and watch has resurfaced.
Kwon Min-soo, who began a term as Bank of Korea deputy governor that day, told reporters that rate increases can bring both policy effects and side effects, adding that it is a time to set policy in a balanced, careful and flexible manner. The remarks were read as revealing the central bank's internal deliberations, suggesting it will weigh multiple variables such as the exchange rate, prices and household debt rather than send a strong signal of a hike. As deputy governor, Kwon is an ex-officio member of the Monetary Policy Board and will attend the monetary policy meeting on the 27th to decide rates, drawing particular attention to the remarks.
Still, with August price indicators likely to turn higher again, expectations remain that the bank will move preemptively to stabilize prices. Lee Heung-hoo, head of the Bank of Korea's price statistics team, said of the August producer price outlook that international oil prices had risen about 11% from the previous month through mid-August, adding that wholesale rates for industrial city gas had also been raised and that continued instability in the Middle East could push producer prices higher. The August consumer price index is also expected to return to the 3% range, in part because of a base effect from SK Telecom's large telecom fee discount a year earlier.
Yoon Yeo-sam, a research fellow at Meritz Securities, said it is hard to read too much into a remark that side effects should be examined, but added that given the recent rise in rates and the burden on households and the self-employed, concern over the side effects of rate increases could grow within the Monetary Policy Board going forward.
