Chuseok demand, end of power discount push producer prices up for second straight month

South Korea's producer prices rose for a second consecutive month in September, as the end of summer electricity discounts and surging demand for agricultural products ahead of the chuseok holiday pushed costs higher. Gains in coal and petroleum products driven by higher oil prices were offset by declines in computers, electronics and optical equipment amid a weaker won-dollar rate, leaving manufactured goods flat from the previous month.

The producer price index for September stood at 129.78 (base year 2020=100), up 0.2 percent from the previous month, the Bank of Korea said Wednesday. The reading extended a run of monthly gains that began in August, when the index rose 0.1 percent. Year on year, producer prices climbed 7.7 percent, slightly narrowing from the 7.9 percent increase recorded in August.

By category, agricultural, forestry and fishery products rose 2.6 percent from the previous month, driven by a 3.7 percent jump in farm produce — including a 42.9 percent surge in cabbage prices — and a 2.7 percent increase in livestock products, including a 10.4 percent rise in beef prices, all reflecting chuseok holiday demand.

Manufactured goods were unchanged from the prior month. Chemical products rose 1 percent, led by ethylene (up 8.2 percent) and container boxes (up 5.9 percent), while coal and petroleum products gained 0.9 percent, with naphtha up 10 percent. Those gains were offset by a 1.7 percent decline in computers, electronics and optical equipment, which included an 11.8 percent drop in computer storage devices and a 4 percent fall in OLED products.

Lee Heung-hu, head of the Bank of Korea's price statistics team, said the rise in coal and petroleum products partly reflected higher international oil prices feeding through with a time lag. He added that the decline in computers, electronics and optical equipment was partly attributable to the weaker won-dollar rate, since OLED and similar products are traded domestically in dollar terms.

The electricity, gas, water and waste category rose 1.3 percent from the previous month, as residential electricity prices jumped 13.4 percent following the expiration of summer progressive billing discounts, and industrial city gas prices climbed 6.6 percent.

Services edged down 0.1 percent from the previous month. Financial and insurance services rose 1 percent, led by brokerage commissions (up 2.7 percent), but that gain was more than offset by a 0.6 percent decline in restaurant and accommodation services, which included a 6.6 percent drop in hotel prices and a 15.8 percent fall in tourist accommodation prices.

The index excluding food and energy, which tracks underlying price trends, was unchanged from the previous month. On a year-on-year basis, it rose 7.7 percent.

The domestic supply price index — which combines producer and import prices to reflect changes in the prices of goods and services — was flat from the previous month. Raw materials rose 3.2 percent, driven by a 3.7 percent increase in imports, while intermediate goods and final goods each fell 0.3 percent, mainly due to declines in imports. Year on year, the index was up 8.5 percent.

The total output price index, which adds exports to domestic shipments, fell 0.1 percent from the previous month. Manufactured goods dropped 0.4 percent, led by a 0.9 percent decline in exports of computers, electronics and optical equipment. Services fell 0.1 percent.

The rise in producer prices is expected to feed through to consumer prices with a lag. Lee said intermediate goods prices had posted high year-on-year gains and that industrial city gas tariffs had continued to rise recently, accumulating pressure on production costs. "This will act as upward pressure on consumer prices going forward," he said.

On the outlook for October producer prices, Lee said a decline in international oil prices through mid-month would serve as a downward factor, but that an increase in wholesale industrial city gas rates in October and higher aviation fuel surcharges would push in the opposite direction.