Producer Prices Rose by the Highest Rate in Six Years

The producer price index during January 2004 increased by the highest rate in six years. The increase is attributed to the price increases of crude oil and raw material, as well as the shock in the livestock industry due to the bird flu and mad cow disease.

The result is very worrisome because the producer price increase, which has a huge influence on the consumer price, could lead to price fluctuation and the worsening of corporate profits.

The prices of raw material rose in rows. The Bank of Korea released the Producer Price Trends during January 2004 on Wednesday. It shows that the producer price index increased by 1.4 percent from last month, twice the level of December. The increase is the largest in 72 months since February 1998, when it recorded 2.4 percent due to plunging won-dollar exchange rate and prices.

Year-on-year increase recorded 3.8 percent, the highest since November 1998 when it stood at 11 percent.

In detail, the prices of agricultural, forestry, and fisheries products marked the highest increase with 3.8 percent due to the bird flu and mad cow disease during the New Year holiday season. The prices of fisheries, such as mackerels, corbina, and cutlass fish increased 68.9, 41.4, and 26.9 percent respectively. The price of pork also rose 14 percent. The prices of chicken and beef fell 8.4 and 5.6 percent respectively due to the drop in demand.

The price surge of crude oil, scrap iron, and nonferrous metals caused the price of industrial products to rise by 1.3 percent month-on-month. The prices of petrochemical products, such as kerosene, gasoline, naphtha, and benzene surged 2.4, 2.1, 5.8 and 23.8 percent respectively.

China is driving the prices of raw materials way up. China has emerged as a black hole in the global raw material market. It consumed 30 percent of the global iron trade last year. Furthermore, China’s consumption of raw material is likely to further increase, as it is projected to register seven to eight percent economic growth this year.

The weak dollar is also to blame for the surging raw material prices. Countries supplying raw materials are raising the prices as their export profits are falling due to the weak dollar. Moreover, the world’s speculative funds are flocking to raw material markets inviting price hikes.

It is projected that international oil prices will be stabilized from the second quarter (April-June) on.

“The factors that drive price hikes will not disappear in a short period of time, so the prices are expected to surge from February on,” said Kim In-gyu, a BOK director.

A red flag for domestic corporations has been raised due to the rising production cost.

“Korean companies are heavily dependent on domestic demand. As companies fail to adjust their product prices to the rising costs caused by sluggish consumption, corporate profitability is worsening,” said Kim Do-hun, a director at the Korea Institute for Industrial Economics & Trade (KIET).

“Terms of trade worsen when the price of raw materials continually rises, and if that happens, the people’s income will not increase in spite of rising production,” said Jeong Mun-geon, a managing director at the Samsung Economic Research Institute. “The only solution is to increase productivity while stemming excess wage hikes.”

Joong-Hyun Park sanjuck@donga.com