Kookgeum Center "US Inflation Rate May Exceed 4% in April-May"

*International Financial Center

[Asia Economy Reporter Kim Eun-byeol] Amid growing concerns about inflation centered in the United States, an analysis has emerged suggesting that the U.S. Consumer Price Index (CPI) inflation rate for April and May could exceed 4%.

On the 13th, the Korea Institute of Finance (KIF) stated in its report titled "Checking the Possibility of a U.S. April-May Inflation Spike" that "assuming factors such as excess savings, explosive demand following the early end of the pandemic, and supply-side price increases, a temporary inflation spike with CPI inflation exceeding 4% cannot be ruled out."

When breaking down inflation, it consists of a base effect due to last year's low price trend and an actual effect (momentum). The KIF analysis indicates that in April and May, not only the base effect but also the actual effect arising from economic recovery will be significant. According to the analysis, the base effect is estimated to account for 1.12 percentage points of the CPI increase from February to May this year.

One reason for expecting a sharp rise in CPI in April and May this year is the rapid resumption of economic activities as vaccination accelerates. The KIF noted, "At the beginning of the year, the U.S. economic growth forecast was 3%, but due to accelerated vaccine distribution and a surge in consumption, it has been revised upward to the 5% range." It added, "In particular, double-digit growth is being suggested for the second quarter." Major institutions such as UBS, Goldman Sachs, and JP Morgan predict that the U.S. growth rate could surge to between 9.5% and 11.0% in the second quarter this year.

The 5.3% increase in U.S. retail sales reported for February last month is also a positive factor for growth. Additionally, the expected effects of the $1.9 trillion U.S. stimulus package are considered a reason why prices may be further driven up.

The KIF expects that if prices surge sharply, the inflation rate will exceed 4%, projecting a baseline scenario of 3.4% CPI inflation for May in the U.S., and up to 3.9% if inflation is somewhat higher than expected.

Furthermore, the report stated, "If inflation rises more sharply than expected in the second quarter, it could disrupt market sentiment," adding, "If core PCE and core CPI continue to exceed expectations, the narrative regarding monetary policy changes could replace the existing story."

Quoting Bank of America (BoA), the report emphasized, "If the recovery overheats too much, hitting supply constraints before reaching full employment and inflationary pressures rise sharply, policymakers may face a serious choice about whether to adjust their accommodative stance by the end of next year."

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