The Bank of Korea Warns of Chain Reaction in US Wages and Prices... Fed Must Respond Timely

Wage and Inflation Growth Correlation Rises to 0.70
Importance of 'Fed Monetary Policy'

[Asia Economy Reporter Jang Sehee] Recently, as the possibility of continuous wage and price increases in the U.S. economy has risen, opinions have emerged that appropriate monetary policy responses to increased inflationary pressures are necessary.

The Bank of Korea stated on the 9th through its 'Overseas Economic Focus' report, "The possibility of continuous wage and price increases is a result of increased demand-side inflationary pressures, so appropriate monetary policy responses are important."

The relationship between wages and prices has been further strengthened since COVID-19. The correlation coefficient between common factors of wage and price growth rates from January to October this year was 0.70. This is higher compared to 0.48 from July 2008 to February 2020 and 0.65 from March 2020 to October 2021.

This means that the recent wage increases are more likely to lead to price increases than in the past. In particular, the Bank of Korea emphasized that unlike last year, attention to prices may shift to rising service fees with a high proportion of labor costs.

In fact, the U.S. Federal Reserve also indicated at the Federal Open Market Committee (FOMC) meeting in December last year that the high inflation rate could persist for a considerable period, suggesting that monetary policy normalization would proceed faster than initially expected.

The Bank of Korea explained, "Whether the U.S. wage and price increases continue depends on the Fed's monetary policy response, the degree of anchoring of inflation expectations, and the speed of improvement in supply chain and labor market imbalances."

It is also difficult to exclude wage increases due to inflation in South Korea.

Lee Ju-yeol, Governor of the Bank of Korea, stated in December last year, "It is difficult to rule out the possibility that inflationary pressures will structurally rise through the interaction of wages and prices," adding, "Looking at wage growth statistics across all industries, it is true that this year's wage growth rate has increased significantly compared to last year."

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