The Bank of Korea Says "Uncertainty in Inflation Outlook Increasing Gradually"

[Asia Economy Reporter Kim Eunbyeol] As uncertainty over inflation outlook continues to expand, the Bank of Korea stated that it is necessary to accurately grasp the ripple effects of item-specific unique factors such as structural changes and micro-policy adjustments, rather than relying solely on traditional economic factors.

On the 9th, in the 'Overseas Economic Focus,' the Bank of Korea pointed out that "recent uncertainty over U.S. inflation outlook is increasing," citing as causes ▲the structural slowdown of inflationary pressures due to anchored inflation expectations and economic structural changes ▲weakened influence of the economy on inflation ▲and expanded influence of item-specific unique factors.

The U.S. economy has been in an expansion phase since June 2009 after the financial crisis, with growth exceeding potential levels and unemployment continuing to decline, but the inflation rate has fluctuated below the Federal Reserve's (Fed) long-term target of 2%.

First, the Bank of Korea reported that the recent influence of the economy and employment on inflation has significantly weakened compared to the past. The relationship between employment and inflation is usually examined through the Phillips curve, and the slope of the Phillips curve, which indicates the degree of inflation's response to employment, has rapidly flattened since the 1980s and 1990s.

Another reason is that inflation expansion is constrained despite economic improvement, as inflation expectations have been anchored through effective monetary policy. Since the Fed introduced the inflation targeting system in 2012 and has operated monetary policy more explicitly aiming at price stability, expected inflation has settled near the Fed's target. Meanwhile, with inflation rates remaining below the Fed's target for a considerable period, concerns about a further decline in expected inflation have emerged in some quarters.

The emergence of Amazon, the world's largest online retailer, intensified price competition between online and offline businesses, lowering inflation. The expansion of inexpensive products from emerging countries also intensified price competition among businesses, limiting inflation growth. The U.S. labor market has shifted in a direction that weakens workers' bargaining power, which has constrained wage growth despite economic improvement, contributing to stagnant inflation. The U.S. union membership rate fell from about 25% in 1980 to 10.7% in 2017.

Additionally, recent government policy changes and other unique factors unrelated to economic fluctuations have acted as downward pressures on inflation. Accordingly, since 2016, the Fed has continuously conducted in-depth analyses of the inflation ripple effects of healthcare service policy changes, and some investment banks (IBs) have recently been strengthening inflation forecasts through micro-level item-specific approaches.

The Bank of Korea stated, "There is a possibility that unique factors will continue to act as downward pressures on inflation for the time being," adding, "The Fed is likely to actively utilize other core inflation indicators that exclude unique factors, as well as core inflation rates, in its inflation-related communications."

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