Israel-Hamas war and lumpy skin disease fuel inflation concerns

Inflation pressures are increasing as the Israel-Hamas war drives oil prices up. Food has also gotten more expensive due to the outbreak of lumpy skin disease among cattle.

Concerns are rising over a potential “oil shock” triggered by the Israel-Hamas conflict. Picture taken at a gas station in Seoul on Sunday. [NEWS1]

Inflation pressures are increasing as oil prices rise due to the Israel-Hamas war, lumpy skin disease makes beef more expensive, and big food and beverage brands raise consumer prices.

Concerns over a potential "oil shock" are rising as the Israel-Hamas war enters what Israeli Prime Minister Benjamin Netanyahu dubbed its "second stage." As of Friday, West Texas Intermediate (WTI) oil prices were up 2.33 percent from the previous day, selling for 85.54 dollars per barrel, and Brent oil prices were up 2.55 percent, selling at 90.48 dollars per barrel. Even gold, considered a safe haven asset, reflected mounting anxiety over the Middle East, with prices per ounce reaching over 2,000 dollars for the first time since May on New York’s Commodity Exchange.

Bank of America recently laid out a few scenarios where the Israel-Hamas war could trigger oil crises. In one potential instance, the bank predicted that oil prices could rise as much as 120 to 130 dollars. If Iran were to blockade the Strait of Hormuz, which 17 million barrels of oil pass through daily, oil prices could rise by up to 250 dollars per barrel.

“Today we are again facing a crisis in the Middle East that could once again shock oil markets,” International Energy Agency (IEA) Executive Director Fatih Birol said in a recent interview with The Associated Press. Birol pointed to the energy supply crisis that arose in the 1970s when the Yom Kippur War and the Iranian Revolution interrupted Middle Eastern oil exports.

An oil shock would undoubtedly hit the global economy hard. The International Monetary Fund (IMF) predicts that a 10 percent increase in oil prices could drive up global inflation by 0.4 points in a year. Global GDP could fall by 0.15 percentage points.

The war could also increase U.S. fiscal spending, the IMF said, which would fuel a rise in government bond rates and, in turn, global market interest rates. Both investment and household consumption would shrink as borrowing costs rise.

The U.S. Federal Reserve will open its Federal Open Market Committee for two days starting Wednesday to determine its key interest rate; the market expects the benchmark interest rate to remain at the current level (targeting a rate of 5.25 to 5.50), and it's possible that the Bank of Korea could raise its own rates in order to reduce its gap with the United States.

“Rising exchange rates due to the difference in interest rates between Korea and the United States could act as a potential source of instability in financial markets,” said Seo Ji-yong, professor in the Business Department at Sangmyeong University. “Interest rate hikes should also be considered in order to stabilize prices and curtail loan growth,” he added.

But an interest rate hike would also hit the Korean economy hard. Consumption and investment could shrink, and nonperforming loans, such as real estate project financing, could go south.

“Rising market interest rates are weighing on the real economy,” said Kang Sung-jin, economics professor at Korea University. “When international oil prices fluctuate due to instability in the Middle East concerns over stagflation also increase, which makes it hard to raise the key interest rate,” Kang added.

Consumer prices for food and beverages have also risen. The most recent shock to domestic beef prices comes from the outbreak of lumpy skin disease (LSD) among cattle, which has so far resulted in 61 confirmed cases and 4,107 cattle being culled or set to be culled in the future.

Average auction prices for hanwoo, or Korean beef, were 14,834 won per kilogram on Monday — up 2,115 won, or 16.6 percent from Sept. 27, according to data from the Korea Institute for Animal Products Quality Evaluation. Prices of processed foods rose 5.8 percent year over year last month, and 15 percent from the same month in 2021.

Oriental Brewery (OB) increased the price of its major beer products, including Cass and Hanmac, by an average of 6.9 percent starting Oct. 11. It was the first price hike in 19 months.

Seoul Dairy Cooperative upped the price of its flagship milk brand Seoul Milk by 4.9 percent earlier this month, Maeil Dairies and Namyang Dairy Products later increased the prices of their milk products by around 4 percent.

Even fast food prices are going up. McDonald’s Korea recently announced that they will raise the prices of 13 menu items by an average of 3.7 percent starting Nov. 2. Mom’s Touch is also upping the prices of four of its burgers by 5 percent starting Oct. 31.

BY SEO JI-WON, KIM JU-YEON [kim.juyeon2@joongang.co.kr]