Producer Prices Turn Downward After 11 Months... "Expected to Rise Again This Month"

Impact of Declining International Oil Prices and Weak Domestic Stock Market

International Oil Prices Rise Again Amid Middle East Instability

Higher Wholesale Industrial City Gas Rates and Base Effect of Telecommunications Fee Discounts

Last month, South Korea's producer price index (PPI) turned downward for the first time in 11 months. This was mainly due to a drop in international oil prices, which led to declines in prices for coal, petroleum products, and chemical products. The drop in brokerage fee income caused by a correction in domestic stock prices also contributed. However, it appears unlikely that this downward trend in producer prices will continue through this month, as international oil prices have risen again amid instability in the Middle East. In addition, higher wholesale prices for industrial city gas and the base effect from last year's telecom bill discounts are expected to exert upward pressure on the producer price index.

According to the "July 2026 Producer Price Index (Preliminary)" released by the Bank of Korea on the 21st, last month's PPI fell by 0.4% from the previous month to 129.39 (2020=100). This marks the first decline in 11 months, since August last year (-0.1%). However, compared to the same month last year, the PPI rose by 7.7%, continuing its steep upward trajectory since the outbreak of the Middle East war. The producer price index reflects changes in the prices of goods and services supplied domestically by producers, and typically influences the consumer price index after a time lag.

The month-on-month drop in producer prices was mainly driven by declines in coal, petroleum products, and chemical products. Coal and petroleum products fell by 5.1%—with diesel and gasoline seeing notable decreases—driven by falling international oil prices. Chemical products also fell by 1.3%, led by items such as polyethylene resins and xylene. As a result, the index for manufactured goods, which includes these categories, dropped by 0.5%.

Electricity, gas, water, and waste management prices dropped by 0.6% from the previous month, as residential electricity prices fell by 11.8% due to the easing of summer tariff rates. For services (-0.4%), prices for financial and insurance services dropped by 7.1%, as brokerage commissions fell following the drop in stock prices. Lee Heunghoo, head of the Price Statistics Team at the Economic Statistics Department 1 at the Bank of Korea, explained, "For intermediary services whose fee structure depends on the underlying asset transaction amount × commission rate, the price of intermediary services (the fee per unit of the underlying asset) fluctuates with changes in the price of the underlying asset and commission rates."

By contrast, prices for agricultural, forestry, and fishery products rose by 1.5% from the previous month as agricultural goods increased by 2.4% due to heatwaves and poor crop yields. Lee added, "Although the heatwave led to poor harvests for some vegetables and high sea temperatures caused losses in aquaculture, the magnitude of the increase is not as large as in July last year, when prices rose by 5.6% month-on-month following the monsoon season and heatwaves. While prices for cabbage and spinach surged in early August as well, compared to the same month last year, they are actually down, so it will be necessary to monitor price trends for the rest of the month."

Last month, the domestic supply price index fell by 1.8% from the previous month, but rose by 10.2% year-on-year. The domestic supply price index measures changes in prices of goods and services shipped and imported into the domestic market, providing insight into the transmission of price fluctuations. Lee explained, "Intermediate goods (-1.7%), raw materials (-7.7%), and final goods (-0.2%) all declined, mainly due to lower import prices."

In July, the total output price index dropped by 0.2% from the previous month, led by declines in manufactured goods such as chemical products (-0.2%) and services (-0.4%). Year-on-year, however, the index surged by 16.6%. The total output price index includes exports along with domestic shipments, providing a broader perspective on the overall price fluctuations of domestically produced goods and services.

This month, stronger upward pressure on producer prices is expected. From August 1 to 19, international oil prices jumped by about 11% compared to the previous month, and wholesale prices for industrial city gas also rose by roughly 11%. Lee noted, "Due to the base effect from last year’s telecom bill discounts, this month’s year-on-year PPI increase will be about 0.2 percentage points higher." Lee also pointed out, "Recent instability in the Middle East is expected to keep exerting upward pressure on the producer price index."

This content was produced with the assistance of AI translation services.