US: "Inflation genie is hard to keep in the bottle"

Soaring Prices, Difficult to Contain Like the Genie in the Lamp
Factors Driving Oil and Rent Increases Persist
Calls for Different Measures Compared to 1982 Inflation Situation

[Asia Economy New York=Correspondent Baek Jong-min] "The inflation genie has come out of the bottle, but we cannot let it back in."

This is the diagnosis given by Son Seong-won, an American economic expert and professor at Loyola Marymount University, regarding the current inflation situation in the United States. On Wall Street, inflation has been compared to the genie from the lamp in the fairy tale Aladdin. Once it comes out, it is equally difficult to catch again.

Inflation, which rose by as much as 7.0% in 2021, is an obstacle to the U.S. economy. Even if supply chain disruptions are resolved, there are still many factors driving inflation up, so the prevailing view is that it will not be easy to bring it down to the Federal Reserve's (Fed) target of below 2% anytime soon.

◇ "High prices for the time being"... What will Powell choose? = On the 12th (local time), President Joe Biden claimed in a statement after the release of the U.S. December Consumer Price Index (CPI) that food and energy prices have fallen. Some of this is true, some is not. CNN reported that prices of meats such as beef and pork have fallen, but prices of other foods like sausages are on the rise. Gasoline prices also fell after December, but with West Texas Intermediate (WTI) crude oil recently surpassing $80 again, there is a high possibility of prices rising once more.

Housing rents are also soaring, and wage increases continue, so inflationary pressures are expected to persist. There is concern that companies may pass on price increases to consumers due to rising wages. Professor Son diagnosed, "While supply chain bottlenecks will ease, excess demand and increased liquidity caused by massive economic stimulus will drive inflation higher over the next few months." He also expressed concern that the ‘wage-price spiral’?where wage increases lead to price increases?could become entrenched.

Although the CPI recorded expected levels, calming some turmoil in financial markets, it is too early to let down the guard. Wells Fargo said, "It is difficult to break the inertia of inflation," and RBC Capital evaluated that "the U.S. Federal Reserve (Fed) may start raising interest rates in March, with four hikes this year and four more next year."

The political situation in the U.S., with the midterm elections scheduled for November this year, is also a variable. Amid high prices, President Biden’s popularity is worsening. In a poll conducted by Quinnipiac University from the 7th to the 10th, only 33% of respondents said they viewed Biden’s job performance positively. If inflation does not ease, it is analyzed that Fed Chair Jerome Powell, entering his second term, will have no choice but to take stronger measures.

◇ "Different from 1982" = There is also a diagnosis that the current inflation situation is different from 1982, meaning the Fed is at a crossroads. Paul Volcker, former Fed Chair who took office in 1979, raised the benchmark interest rate to 19% to curb inflation caused by oil price increases due to the Iranian Revolution. Inflation was eventually controlled in 1982, but the economy fell into recession. The U.S. experienced economic downturn and rising unemployment, and had to witness sovereign defaults and debt crises in Mexico and Latin American countries.

The Wall Street Journal (WSJ) argued that instead of 1982, the situations of 1946 and 1973 should be kept in mind. In 1946, suppressed demand exploded after World War II, and in 1973, inflation and unemployment had been stable before inflation occurred.

WSJ advised that Fed Chair Jerome Powell’s current challenge is to determine whether today’s inflation more closely resembles that of 1946 or 1966.

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