Similar Trend as Early This Year?... "Inflation and Interest Rate Rise Unlikely to Continue"

With the End of COVID-19 Subsidies That Caused Labor Shortage Alongside With-Corona
Oil Prices Rise Due to Deferred Demand from COVID-19

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Gong Byung-sun] Although the financial market is currently facing difficulties due to inflation and rising interest rates, there is an interpretation that it is hard to see this as a sustained trend. This is because the current situation is similar to that of February this year, suggesting it could ease sufficiently before the first half of next year.

According to IBK Investment & Securities on the 17th, simultaneous emergence of risk factors in the US and China has increased concerns about stagflation, where inflation and economic recession occur simultaneously. In fact, the International Monetary Fund (IMF) lowered the US growth rate for this year from the previous 7% to 6%. Additionally, the US 10-year Treasury yield, which was around 1.4% earlier this month, rose to 1.628% on the 11th.

However, securities analysts believe this trend will not last long. Similar to the tapering controversy that shook the market in February and March, it is highly likely to subside quickly.

The securities industry explained that the current supply-driven inflation concerns did not arise from structural factors. The transportation network congestion, which caused supply chain bottlenecks, originated from labor shortages. The labor shortage is largely due to reduced job-seeking efforts caused by movement restrictions and subsidy payments.

Jung Yong-taek, a researcher at IBK Investment & Securities, said, “With the rapid spread of 'With Corona,' which means a gradual return to normal life, and the winding down of COVID-19 subsidies, although there is uncertainty about the duration, these are temporary factors that can sufficiently ease before the first half of next year.”

He also viewed that the rise in raw material prices is unlikely to continue. Although oil prices rose due to increased demand, this was because demand that had been delayed by COVID-19 temporarily surged. Liquidity and supply seem to have a greater impact than demand.

Researcher Jung said, “Excess liquidity is fueling raw material prices, which act as speculative assets. Supply is now influenced not only by the Organization of the Petroleum Exporting Countries (OPEC) but also by non-OPEC countries like Russia and the US shale oil industry.” Currently, as the US implements the With Corona policy, the number of shale oil drilling rigs is increasing, making it likely that oil prices will fall.

Furthermore, the strength of the US dollar is another factor to note. The dollar, a safe-haven asset, and crude oil prices, a risk asset, have an inverse correlation. As interest rates rise, liquidity conditions worsen, and risk-averse sentiment is reflected in the dollar’s value. In other words, as demand for risk assets decreases, oil prices tend to decline.

Researcher Jung emphasized, “The unusual phase we are experiencing now will conclude after mentions and implementation of tapering. The US Federal Reserve (Fed) is likely to implement tapering in November or December this year, and inflation concerns that have spread to stagflation will gradually shift the focus to economic issues.”

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