As tensions over the Strait of Hormuz in the Middle East escalate, domestic and global financial markets lurched again. International oil prices surged as much as 9% intraday to surpass $105, pushing the exchange rate back toward 1,500 won. As inflation fears grew, the possibility of rate hikes resurfaced, sending domestic and overseas government bond yields higher again. With the U.S.·Iran war dragging on contrary to expectations and oil prices continuing their ‘high-altitude flight’, concerns are mounting that the domestic inflation rate will also rise quickly starting this month.

As U.S.·Iran cease-fire talks faltered and the United States unveiled a plan to blockade the Strait of Hormuz, West Texas Intermediate (WTI) futures rose more than 9% intraday on the 13th to top $105 per barrel. Brent crude also at one point jumped more than 7% to around $102.

As international oil prices spiked again, the wondollar exchange rate in the Seoul foreign-exchange market closed the session at 1,489.3 won per dollar, up 6.8 won from the previous session. At one point in the morning, it surged more than 17 won to as high as 1,499.7.

Stocks were also weak. The KOSPI closed down 50.25 points (-0.86%) from the previous trading day at 5,808.62. Foreign investors were net sellers of roughly 460 billion won in the main stock market.

In the Seoul bond market, the 3-year Treasury yield also finished at an annual 3.382%, up 0.022 percentage point from the previous session, rising for a third straight trading day. Intraday, it even topped 3.4%.

The breakdown in U.S.·Iran negotiations also influenced a rise in global yields. The U.S. 10-year Treasury yield topped 4.3% on the day, and Japan’s 10-year government bond yield touched 2.49% intraday, the highest in 29 years since 1997, as inflationary pressures intensified.

As the Middle East situation drags on, price pressures are steadily building and consumer sentiment is weakening. Signs of both inflation and a consumption slowdown are already appearing in the United States. The U.S. Consumer Price Index (CPI) for last month, released on the 10th (local time), rose 0.9% from the previous month and 3.3% from a year earlier. Compared with February’s CPI, which rose 0.3% month-on-month and 2.4% year-on-year, the pace of increase became markedly higher.

On the same day, the University of Michigan’s April consumer sentiment index came in at 47.6, down about 10% from the previous month, the lowest since the survey began in 1946.

It is the same at home. Last month, the domestic Consumer Price Index rose 2.2% from a year earlier, an increase of only 0.2 percentage point from February, but from this month the impact of high oil prices on inflation is expected to be reflected in earnest. As oil prices remain elevated, upward pressure on prices will be passed through to other items, including manufactured goods.

Citigroup said in a report that this month’s domestic inflation rate is projected to rise 2.8% year-on-year and 0.7% month-on-month. There are also projections that U.S. inflation this month will climb into the mid-4% range.

Kim Jeong-sik, emeritus professor in the Department of Economics at Yonsei University, said, “Because oil prices are likely to remain elevated, manufactured goods prices will rise with a lag, inflation will increase, and the Bank of Korea may raise rates” and “In that case, the economy will end up contracting and entering stagflation (rising prices·recession).”

Woo Seok-jin, professor in the Department of Economics at Myongji University, said, “Since Korea alone cannot keep oil prices low, prices will begin to rise in earnest from May” and “In cost-push stagflation, production and consumption inevitably contract as well.”