South Korea’s import prices fell for a second straight month in July as lower oil prices and a stronger won reduced the cost of energy and raw materials brought into the country.
The decline offers an early sign that some of the inflation pressure weighing on one of Asia’s largest manufacturing economies may be starting to ease, even though import costs remain sharply higher than a year ago.
That matters beyond South Korea because the country sits deep inside global manufacturing supply chains. Korean factories turn imported oil, metals and chemicals into semiconductors, automobiles, batteries, electronics and other products sold around the world. When those input costs rise, the pressure can eventually reach companies that depend on Korean suppliers. When they fall, they can give manufacturers more room to absorb costs rather than pass them through.
The Bank of Korea, South Korea’s central bank, said import prices declined 1% in July from the previous month. It was the second consecutive monthly drop, though smaller than the 4.4% decline recorded in June. Lower prices for coal, petroleum products and primary metals accounted for much of the decrease.
Currency and energy markets provided much of the relief. The won strengthened about 2% against the dollar from the previous month, lowering the local currency cost of imports. Dubai crude, a benchmark commonly used for oil shipments to Asia, fell to $76.7 a barrel from $79.4.
The improvement remains fragile. South Korean import prices were still 18.7% higher than a year earlier. The annual increase has eased from levels above 20% recorded between March and June, but prices for several important industrial inputs remain elevated.
Imported crude oil prices were 18.9% higher than a year earlier, while methyl ethyl ketone, a chemical used in industrial production, rose 64.8%. Those increases matter in an economy that depends heavily on overseas supplies of energy and raw materials to keep its factories running.
Economists note that persistently high prices for raw materials and intermediate goods can continue to put upward pressure on consumer inflation. Because changes in import costs typically take time to move through production and distribution channels, their full impact may not appear in household prices immediately.
The outlook for August is already showing how quickly that relief could reverse. The won strengthened about 5% on average between Aug. 1 and Aug. 12 compared with July, which would normally reduce import costs. Oil prices, however, rose about 7.3% over the same period as tensions in the Middle East intensified, leaving South Korea exposed to competing forces from currency and energy markets.
At the same time, the country is receiving a boost from the other side of its trade ledger. Export prices rose 1% from June and 49.1% from a year earlier, the strongest annual increase since March 1998. Semiconductor prices were a major contributor, with DRAM prices rising 270.3% from a year earlier and flash memory prices climbing 248.1%.
That combination of lower monthly import costs and sharply higher export prices has strengthened South Korea’s purchasing power. The country’s net barter terms of trade index rose 24.7% from a year earlier in July, while its income terms of trade index increased 49.7%.
The result is an unusual split. South Korean manufacturers are beginning to receive some relief from oil and currency costs, but imported materials remain expensive enough to keep inflation risks alive. At the same time, soaring semiconductor prices are lifting export earnings. Because South Korea supplies critical components and finished goods to industries around the world, the balance between those two forces provides a useful signal of whether inflationary pressure inside the global manufacturing system is actually cooling or merely shifting from one part of the supply chain to another.
