U.S. inflation rises over 8 percent in August

The increase in the consumer price index turned out to be higher than expected, jolting the world’s financial markets. According to the U.S. Bureau of Labor Statistics, inflation rose 8.3 percent in August, 0.3 percentage points higher than the market expectation. Worries over continuing inflation have driven down global stock prices, and the won-dollar exchange rate topped 1,390 won in 13 years and five months. First Vice Minister of Economy and Finance Bang Ki-sun held an emergency economic meeting on Wednesday and ordered civil servants to take caution and pay heed to the market.

The increase in the inflation rate in the U.S. is attributable to a simultaneous increase in housing, medical services, automobiles, and food prices. High prices do not just apply to some items but have a broad-based impact. The primary cause of inflation was analyzed initially to be a surge in oil prices arising from the supply chain crisis. Having hit 120 U.S. dollars per barrel, oil prices decreased to 80 dollars, and some cited this reduction in oil price as evidence that inflation may have peaked, but this argument lost persuasiveness.

Price pressures and high exchange rates have put businesses in crisis mode. The battery and petroleum chemical industry with high dollar debt has built up the dollar-denominated debt by over 800 billion won in the past six months. Korean Air and Asiana Airlines, which pay for fuel and aircraft leases in dollars, incur a foreign exchange loss of 35 billion won and 28.4 billion won, respectively, every time an exchange rate increases by 10 won. The automobile industry used to benefit from an increase in the exchange rate, but things have changed, and global economic stagnation has slowed down an increase in sales while the cost of raw materials continues to rise.

There is a forecast that the Fed may go beyond taking a giant step of raising the key interest rate next week by 0.75 percentage points and take an ultra step by raising the rate by one percentage point, indicating that the market is taking price pressures in August as a warning of chronic inflation.

BOK Governor Lee Chang-yong gave notice of a baby step of raising the key interest rate by 0.25 percentage points for the time being, saying, “The central bank is currently not considering a big step.” As inflation concerns rebound, the Bank of Korea must consider all options and review its monetary policy. Normalizing the “liquidity party” that started with the financial crisis and continued well into the Covid-19 pandemic is bound to take some time. We must face the reality that it takes time to get out of the era of austerity.