The Bank of Korea: "US Inflation Debate... Rapid Price Increase Unlikely to Persist Long"

Bank of Korea 'Overseas Economic Focus'

[Asia Economy Reporter Kim Eun-byeol] Recently, concerns about the spread of inflation have increased due to the faster-than-expected economic recovery in the United States and the planned additional monetary easing. However, the Bank of Korea has judged that the rapid rise in prices is unlikely to continue for a long period.

On the 11th, the Bank of Korea stated in its 'Overseas Economic Focus' report, "Prices in the U.S., which plummeted last year due to the spread of COVID-19, have gradually accelerated as the pandemic situation improved and economic activities resumed." It added, "Prices of goods quickly reduced their decline and turned upward, with energy prices leading the inflation, while food prices, which have steadily increased since COVID-19, also contributed to raising the overall price level."

From the demand side, the Bank of Korea explained, "As the pandemic subsides, economic activities are gradually becoming more active and consumer demand is recovering rapidly," but also noted, "The normalization of service consumption is delayed, and there are limits to stimulating consumption through fiscal measures, which act as factors restraining inflationary pressures."

On the supply side, it analyzed that domestic and international supply chains, which were shocked by the pandemic, have not fully recovered. Inventories in manufacturing have accumulated, increasing demand for raw materials, causing bottlenecks in some supply channels, and overall input prices remain unstable. Prices of major raw materials and components such as crude oil, metals, and semiconductors have recently shown a strong upward trend, causing import prices to reverse into an increase this year. However, it explained that the recent rise in input prices is mainly due to temporary factors such as base effects and supply bottlenecks, and thus is unlikely to act as a sustained supply-side inflationary pressure.

The Bank of Korea also noted that structural downward pressure factors that supported the low inflation trend before the pandemic?such as low-cost product supply from low-wage emerging countries, cost reductions through innovation in production and distribution, and trust in central banks' price stability commitments?are still in effect. The spread of automation systems has increased productivity, and e-commerce has become widespread, intensifying competition and pushing prices down.

Furthermore, the Bank of Korea forecasted, "In the coming months, the inflation rate will rise due to a base effect from last year's sharp decline, rising input prices, and increased compensatory consumption." Citing a Bloomberg survey, it expected the U.S. inflation rate (PCE, year-on-year) to rise from 2.0% in the first quarter to 2.5% in the second quarter.

However, the Bank of Korea stated, "Medium-term inflationary pressures are not high due to anchored inflation expectations and delayed recovery of full employment. Additionally, delayed economic recovery in other advanced countries and the continued strength of the U.S. dollar are expected to persist for some time, making it difficult for the rapid rise to continue over the long term."

In particular, it predicted, "The normalization of the service sector is delayed, and with the spread of the digital economy, it is not easy to resolve idle labor in the short term," adding, "Wage increases are unlikely to act as a fundamental cost-side inflationary pressure."

The Bank of Korea identified uncertainties such as the progress of the pandemic, trends in raw material prices, timing and composition of fiscal spending, and multiplier effects. It also added, "It is necessary to closely monitor the recovery status of the service sector and long-term inflation expectations."

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