The Bank of Korea Warns of Inflation Rise Due to Large US Stimulus...Low Sustainability

Bank of Korea 'Overseas Economic Focus'

[Asia Economy Reporter Eunbyeol Kim] The Bank of Korea stated on the 14th that "concerns about inflation expansion have emerged in the United States as large-scale additional economic stimulus measures are being pursued recently."

In the 'Overseas Economic Focus' released that day, the Bank of Korea analyzed, "Concerns about inflation have increased recently due to the recent pursuit of large-scale economic stimulus measures and the Federal Reserve's (Fed) indication of accepting inflation through the introduction of the Average Inflation Targeting (AIT) system."

In the United States, following the implementation of a $900 billion (4.3% of GDP) fiscal stimulus package (the 5th round) at the end of last year, an additional $1.9 trillion (9.1%) stimulus plan was approved by Congress on the 10th of this month.

The Bank of Korea also explained, "Expectations for economic recovery due to the distribution of the COVID-19 vaccine and factors such as rising raw material prices have further increased inflation expectations sharply."

As the expected inflation embedded in market interest rates has risen significantly recently, major investment banks (IBs) expect core consumer prices to surge into the 2% range starting this month. The difference between the 10-year government bond yield (nominal) and the inflation-linked bond yield (real), known as the breakeven inflation rate (BEI), rose from 1.77% at the end of November last year to 2.22% on the 5th of this month.

While such inflation concerns may materialize and cause short-term inflation, the Fed views the possibility of sustained inflation expansion as low. It is expected to be a temporary phenomenon.

Fed Chair Jerome Powell said to the Wall Street Journal (WSJ) on the 4th of this month, "The surge in demand due to economic normalization will act as upward pressure on prices combined with base effects, but this will be a temporary phenomenon."

Structural changes such as the expansion of online transactions, productivity improvements, automation and unmanned operations, and population aging are also factors that limit price increases.

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