2nd Quarter to Check 'X-pleation'... Experts Say "No Inflation Concerns for Han"

US Inflation Expected to Remain in 3% Range in April-May
South Korea Interprets Moderate Inflation as a Sign of Economic Recovery
However, Possibility of Tightening Remains if US Economy Overheats

[Asia Economy Reporter Kim Eun-byeol] With the rapid distribution of COVID-19 vaccines and the base effect from last year's economic shock also at play, global inflation is expected to rise significantly in the second quarter. In the United States, estimates suggest that the Consumer Price Index (CPI) increase rate for April-May will exceed 3% compared to the same period last year. In South Korea, inflation has already been rising year-on-year. Nevertheless, economic experts explain that the high inflation is not a sustained inflationary trend. In South Korea's case, appropriate inflation should rather be interpreted as a sign of economic recovery.

Strong Reflation Created by Vaccines and US Economic Stimulus

There is analysis that the US CPI for April-May could exceed 3% and even reach up to 4%. The International Finance Center stated in its 'US April-May Inflation Spike Possibility Check' report, "Assuming excess savings, explosive demand due to early end of the pandemic, and supply-side price increases, a temporary inflation spike with CPI growth exceeding 4% cannot be ruled out." When breaking down inflation, it consists of the base effect from last year's low inflation trend and the actual effect (momentum). The International Finance Center's analysis shows that in April-May, not only the base effect but also the actual effect from economic recovery is 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.

DB Financial Investment forecasted, "The consumer price increase rate for April-May will inevitably exceed 3% year-on-year based on the headline CPI." Analysts Park Sung-woo and Moon Hong-chul noted, "April last year was the month when the strongest lockdown measures were implemented in the US, so the base effect is large," adding, "Smooth vaccine distribution and stimulus measures following the Blue Wave (Democratic Party's control of both houses) will be the main drivers boosting US growth and inflation." They expect that the base effect will have a significant impact and that stimulus measures will push prices up. Although inflation rates are expected to gradually decrease after the third quarter, the annual inflation rate for 2021 could still record the highest increase in the past decade.

[Image source=Yonhap News]

South Korea's Inflation Sees Largest Increase in 1 Year and 2 Months... Experts Agree "Not Inflation"

Inflation is also rising in South Korea. According to the Consumer Price Index trends from Statistics Korea, last month's CPI was 107.16 (2015=100), up 1.5% compared to the same month last year. This is the highest increase since January last year (1.5%). It showed a two-month consecutive increase above 1%, following February's 1.1% rise.

Prices of agricultural, livestock, and fishery products closely related to grocery prices rose by 13.7%. Green onions, which suffered poor harvests due to last year's prolonged rainy season and typhoons, surged by a staggering 305.8%, the highest increase since April 1994 (821.4%). Apples (55.3%), red pepper powder (34.4%), and rice (13.1%) also saw large price increases. Livestock products also rose by 10.2%, with eggs (39.6%), domestic beef (11.5%), and pork (7.1%) all increasing.

However, economic experts particularly assess that the recent inflationary trend is temporary. Especially in South Korea, where before COVID-19 there was concern about deflation due to near-zero inflation, the dominant interpretation is that inflation should be seen as a sign of economic recovery rather than a cause for inflation worries. Lee Eok-won, First Vice Minister of Strategy and Finance, stated at the Korean New Deal and Price-related Vice Ministers' Meeting held at the Government Seoul Office, "The possibility that the overall consumer price inflation for this year will exceed the 2% inflation target remains limited." Bank of Korea Governor Lee Ju-yeol also said on the 23rd of last month, "Inflation may temporarily rise, but the possibility of sustained expansion is low," adding, "It is not a situation where monetary policy should respond to inflation risk expansion at this time."

[Image source=Reuters Yonhap News]

Concerns Over Monetary Tightening Due to Excessive US Inflation

Although South Korea's inflation rate itself is not high, there is concern that if US inflation rises more than expected, it could lead to monetary tightening, which is a burden. Last month, at the US House Financial Services Committee, Jerome Powell, Chair of the Federal Reserve (Fed), stated that prices will rise this year but he is not worried about inflation. The core Personal Consumption Expenditures (PCE) inflation, which the Fed uses as a basis for policy decisions, was 1.5% in January and 1.4% in February. The Fed recently projected in a statement following the Federal Open Market Committee (FOMC) meeting that the median inflation rate for this year will reach 2.2%, with a possible temporary peak of 2.5%. Powell said, "Over the past 25 years, disinflationary pressures have been strong," adding, "A temporary price spike will not change this trend." The essence of Powell's remarks is that since price increases are temporary, the likelihood of a shift to tightening such as tapering (reducing asset purchases) is very low for the time being.

However, the market still harbors doubts about the Fed. The faster-than-expected US vaccine rollout and continued fiscal spending by the Biden administration could cause growth to surge. If the economy normalizes, prices could exceed 2% and reach the 3% range, which could lead the Fed to reduce monetary easing sooner than expected. This is also why US Treasury yields have been rising. The 10-year US Treasury yield has been climbing since early this year and is currently around 1.7%.

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