Oil price rise might boost inflation

Korea's current-account surplus will be limited to about US$800 million next year if oil prices remain over US$30 per barrel, and the current account will shift to US$2.1 billion deficit if the oil prices sustain US$35.

The Korea Economic Research Institute, a research center affiliated with the Federation of Korean Industries, said in its report on international oil price rise and its impact on the macroeconomy that the nation's current-account surplus in 2001 will decline from an estimated US$4.4 billion based on US$25 per barrel to US$880 million if oil prices maintain the US$30 level.

Also, the energy crunch will have an ill effect on the nation's macroeconomic management: Consumer price inflation will rise by an additional 0.9 percentage point to an annual rate of 4%, while Korea's economic growth rate will slide 0.6 point to 5.2% as a result of weakened investment and consumer spending.

If oil prices stay as high as US$35 per barrel, next year's current-account balance will fall by US$6.58 billion from the original projection, thus shifting to US$2.14 billion in deficit. Also, consumer price inflation will rise by an additional 1.5 point, according to the FKI report.

The institute pointed out that the government must drastically change its economic management policy by downwardly adjusting its macroeconomic goals to cope with the changing environment, as the situation might trigger inflation with rising import prices and production costs if international oil prices keep rising.

Park Won-Jae parkwj@donga.com