Escalating Middle East war could push up South Korea's inflation by 0.32 percentage points next year, budget office warns

A further escalation of the Middle East war and a resulting surge in global oil prices could push South Korea's consumer inflation rate up by 0.32 percentage points next year while shrinking its trade surplus by $17 billion, according to a new government analysis. Economic growth could also slow by 0.16 percentage points.

The National Assembly Budget Office released the findings Sunday in its latest report, "2027 NABO Economic Outlook: 2026–2030," which assessed the potential domestic impact of rising oil prices driven by a worsening Middle East conflict.

The budget office's baseline forecast projects consumer inflation at 2.4 percent and economic growth at 2.7 percent next year, assuming that cease-fire negotiations make progress and global crude supply chains recover, allowing oil prices to stabilize quickly. The office warned, however, that an escalation of the conflict could push inflation above that baseline while dragging on growth.

The escalation scenario assumes that US-Iran negotiations remain deadlocked, that Houthi and other attacks disrupt alternative crude supply routes, and that winter heating fuel demand adds further pressure on prices.

Under that scenario, international oil prices would spike above $110 per barrel in the fourth quarter of this year before staying above $95 per barrel through the first half of next year, then easing back to the $80 range only in the second half.

The annual average oil price is assumed to be around $95 per barrel this year and around $90 next year — $4.20 and $13.30 higher, respectively, than the baseline scenario derived from a simple average of forecasts by the IMF, the World Bank and the US Energy Information Administration.

The economic impact is expected to be larger next year than this year. This year, compared with the baseline, consumer inflation would rise by 0.12 percentage points and growth would slow by 0.06 percentage points, while the trade surplus would shrink by $6 billion.

Next year, inflation would exceed the baseline by 0.32 percentage points and growth would fall short by 0.16 percentage points. The trade surplus would decline by $17 billion. Export growth on a customs-clearance basis would slow by 0.24 percentage points, while import growth would accelerate by 2.44 percentage points.

South Korea's heavy reliance on Middle Eastern crude could amplify the economic fallout from any oil price surge. Last year, the Middle East accounted for 70.7 percent of the country's total crude imports.

The office also flagged the risk that rising oil prices could spread beyond petroleum products to other industrial goods. During the sharp oil price spike in the first half of this year, higher petroleum costs partly fed through to durable goods and other manufactured products — a pattern that could resurface and add broader inflationary pressure if prices rise again.

The budget office said the recent renewed deterioration of the Middle East conflict and the accompanying jump in oil prices have reduced the likelihood of its baseline scenario materializing while increasing uncertainty around the energy outlook. The actual magnitude of any price increase and how long instability persists will depend on whether US-Iran negotiations reach a deal and on international mediation efforts, it added.