🚨 December Producer Price Increase

Today Korean Economic News | 2025.01.22

📌 December Producer Prices Up 0.3%↑ for Second Consecutive Month... "Impact of Exchange Rates and Oil Prices"

💬 Producer prices in December increased by 0.3% for the second consecutive month due to the impact of the won/dollar exchange rate and international oil price increases, with rising prices of agricultural, forestry, and fishery products and industrial products being the main causes.

1️⃣ Easy to Understand

The news is that producer prices have risen for two consecutive months. Let me explain what this means for our daily lives.

Producer prices, simply put, are 'the costs that companies incur when making products.' Let's take a bakery as an example. To make bread, a bakery owner needs raw materials like flour, sugar, and oil, as well as energy like electricity and gas. When all these costs rise, producer prices increase.

The main causes of this producer price increase are the rise in the won/dollar exchange rate and international oil prices. When the won's value falls, imported raw material prices rise, and when oil prices increase, energy costs rise. As a result, the cost of producing agricultural products and industrial goods has generally increased.

Going back to the bakery example, if the flour is imported, it must be purchased at a higher price when the exchange rate rises. Also, electricity or gas costs for operating the oven increase due to rising oil prices. Eventually, if the bakery owner finds it difficult to bear these increased costs, they have no choice but to raise bread prices.

In this way, producer price increases will, over time, also affect the prices that consumers pay. That's why economic experts watch producer prices as a 'signal flare for future consumer prices.'

2️⃣ Economic Terms

📕 Producer Price Index (PPI)

The Producer Price Index is an indicator that measures price changes in goods and services traded between businesses.

• It includes price changes in all cost elements used in business activities, such as raw materials, intermediate goods, and final products.
• It tends to lead the Consumer Price Index and is used as an important indicator for predicting future inflation trends.

📕 Exchange Rate

Exchange rate refers to the ratio at which one country's currency is exchanged for another country's currency.

• A rise in the won/dollar exchange rate means more won is needed to purchase one dollar.
• Exchange rate increases lead to higher prices for imported raw materials, contributing to increased domestic production costs.

📕 International Oil Price

International oil price refers to the price of crude oil traded in the global market.

• West Texas Intermediate (WTI), Brent crude, and Dubai crude are commonly used as benchmarks for international oil prices.
• Rising oil prices lead to increased transportation costs, manufacturing costs, and overall production costs, affecting prices.

📕 Inflation Pass-through

Inflation pass-through refers to the process by which cost increases at the production stage are transmitted to the final consumption stage.

• Not all producer price increases are passed through to consumer prices, and the degree varies depending on market conditions and firms' pricing power.
• The speed and extent of pass-through are influenced by various factors including economic environment, competitive conditions, and monetary policy.

3️⃣ Principles and Economic Outlook

💡 Structural Causes of Producer Price Increases

• The December producer price increase is the result of multiple structural factors working together.
  • First, the won/dollar exchange rate increase played a key role. The won's weakness, which has persisted since the second half of last year, has increased the prices of imported raw materials and intermediate goods. U.S. interest rate policy, global economic uncertainty, and geopolitical risks have collectively contributed to the decline in the won's value, leading to increased production cost burdens for domestic companies.
  • Second, international oil price increases have raised energy-related costs. Overall production costs have increased as oil prices have risen due to Middle East tensions, OPEC+'s production cut policy, and global demand recovery.
  • Third, the increase in agricultural, forestry, and fishery product prices is notable. Poor harvests due to abnormal climate conditions and increased feed costs for livestock have been major factors in the price increases of these products.
• These structural factors are difficult to resolve in the short term, suggesting that upward pressure on producer prices may continue for the time being.

💡 Possibility of Pass-through to Consumer Prices

• The impact of producer price increases on consumer prices is determined by various factors. The fact that producer prices have risen for two consecutive months means that companies' cost burdens are increasing, which may be reflected in consumer prices with a time lag. However, the degree and speed of this pass-through can vary depending on several variables.
  • First, the market's competitive structure is an important variable. In highly competitive industries, companies find it difficult to fully reflect cost increases in prices.
  • Second, consumer sentiment and purchasing power have an impact. In the current situation of economic slowdown concerns and household debt burden limiting consumer spending power, companies' ability to raise prices may be restricted.
  • Third, the government's price stability policy is also an important factor. Pass-through to consumer prices can be partially suppressed through public utility fee management and price stabilization measures.
• Experts expect that producer price increases will be partially reflected in consumer prices within the next 2-3 months, but the impact will be differentiated by item. In particular, energy-intensive products, highly import-dependent items, and essential consumer goods may experience greater price increase pressure.

💡 Impact on Monetary Policy and Economic Outlook

• Producer price increases are an important variable that could influence the Bank of Korea's monetary policy decisions. As the Bank of Korea considers price stability a major responsibility, it may adjust its monetary policy stance if producer price increases are likely to be widely transmitted to consumer prices. While the market currently expects the Bank of Korea to cut interest rates this year, if producer price increases persist, the timing of interest rate cuts may be delayed.
• Producer price increases also affect companies' profitability and investment decisions. Companies unable to sufficiently pass cost increases on to prices may face margin compression, which could lead to reduced investment and employment. Additionally, export companies may face concerns about weakened price competitiveness in the global market. However, exchange rate increases bring the effect of increased won-based earnings for export companies, so the impact may be differentiated between export-oriented and domestic-oriented companies.
• Experts predict that while producer price increases will add to the cost burden for economic actors in the short term, this will not directly lead to an economic recession. This is because positive factors such as global economic recovery and improvement in the semiconductor industry are also at play.

4️⃣ In Conclusion

The 0.3% increase in December producer prices for the second consecutive month is an indicator showing various challenges facing the domestic economy. External factors such as won/dollar exchange rate increases and international oil price rises are acting as major causes increasing domestic production costs.

In the short term, this producer price increase will act as a factor pressuring companies' profitability. Small and medium-sized enterprises with high dependency on imported raw materials and weak pricing power in the market may face greater difficulties. Companies will need to respond to cost increase pressures through cost efficiency, finding alternative raw materials, and diversifying supply chains.

From a consumer perspective, there is a need to prepare for the possibility of price increases centered on certain items within the next 2-3 months. Price increase pressures may be more pronounced in energy-related costs, food prices, and imported consumer goods. It is time for households to distinguish between essential and discretionary spending and consider household budget adjustments in preparation for price increases.

For policymakers, a balanced approach is needed to ensure that producer price increases are not excessively transmitted to consumer prices. Along with short-term price stability, structural responses such as improving energy efficiency, strengthening domestic production bases for key raw materials, and managing global supply chain risks are also important in the long term.

From an investment perspective, there is a need to differentiate and analyze industry impacts in a situation of increased volatility in raw material prices, exchange rates, and oil prices. Attention can be given to companies with pricing power that can pass cost increases on to consumers, companies with high cost competitiveness, and export companies that benefit from exchange rate increases.

In conclusion, the increase in producer prices is a signal showing that our economy is exposed to global volatility. However, this will not necessarily lead to an economic recession or serious inflation. With appropriate responses from economic actors and policy support, we can overcome these cost-side challenges and return to a stable growth path. It is an important time to maintain a flexible attitude in responding to economic environment changes by monitoring the trends in producer prices and the degree of transmission to consumer prices.