[Insight & Opinion] Five Key Points on Inflation Highlighted by the Fed Vice Chair

Core Consumer Price Inflation Eases
Tightening to Continue for 2% Inflation Target
Trend Requires Monitoring of Indicator Declines

During the Chuseok holiday period, many people's main concern was inflation. The problem is that it is difficult to predict how inflation will progress. In such times, the best approach is to consider the opinions of individuals or institutions who have more information and insight than oneself and can foresee the situation. The speech given by Lael Brainard, Vice Chair of the Federal Reserve (Fed), at 'The Clearing House and Bank Policy Institute Annual Conference' is recently regarded as one of the most valuable references. The key points of the speech can be summarized in five parts as follows.

First, over the past year, inflation in the United States and worldwide has intensified due to multiple and complex factors on both demand and supply sides amid the Russia-Ukraine war and the process of overcoming the pandemic. Since the beginning of this year, consumer spending has been restrained due to the slowdown in U.S. economic growth, accelerating inflation, and fiscal and monetary tightening. In particular, low-income groups, who spend about three-quarters of their income on essential consumption such as food, fuel, and housing, have been hit hard.

Second, since June, the pattern of inflation in the U.S. has been changing. Energy prices, including fuel, have stabilized downward, but upward pressure on food prices continues globally. Core consumer price inflation excluding fuel and food is easing. The easing of core inflationary pressures on the demand side is a welcome development. However, to be confident that inflation will return to within 2%, it is necessary to observe the inflation rates over the coming months.

Third, the time it takes to bring inflation back to 2% depends on a combination of continued easing of supply constraints, a slowdown in demand growth, and a reduction in corporate pricing markups. Recently, margins in the U.S. automobile and retail sectors are estimated to have expanded. As demand weakens in the future, there will be pressure to reduce product prices. At such times, a process that lowers inflationary pressure by reducing demand for interest rate-sensitive durable goods is required.

Fourth, the labor market is in good condition. In particular, the ratio of job openings to job seekers is close to historically high levels. Companies that had difficulty restoring and replenishing their workforce during the pandemic tend to put more effort into retaining employees. However, it is uncertain whether this situation will continue, and various labor market indicators need to be closely monitored.

Fifth, to achieve further stabilization of the inflation environment and confidence in returning to 2%, monetary and financial tightening policies such as policy rate hikes and balance sheet reduction must be maintained for the time being. However, the economic environment is uncertain, policy paths depend on data, and precise courses of action will change as forecasts evolve.

Brainard does not guarantee how inflation will unfold. However, she made specific and clear assertions about how U.S. inflation has occurred and spread, what phenomena will appear in terms of future demand and supply, and the Fed’s commitment to doing its best to stabilize inflation.

Inflationary pressures from rising prices of commodities such as energy, raw materials, and agricultural products, as well as price increases in intermediate goods, imported goods, and final goods, are easing. If consumer spending decreases due to reduced consumer expenditures, it can be judged that core inflationary pressures have also diminished. To establish this as a trend, a decline in indicators over 1 to 2 months and stabilization of global supply shocks are necessary. For this to lead to a trend forecast, stabilization of demand and supply through the winter heating season is required. Inflation in Europe, Korea, and other regions will be confirmed to stabilize later than in the U.S., as price increases for raw materials, intermediate goods, imported goods, final goods, and public utility charges have not been immediately reflected.

Dongmin Lim, Economist at Kyobo Securities

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