The Bank of Korea: "US Home Price Increase and Labor Shortage... Inflation Concerns Expand"

Bank of Korea 'Overseas Economic Focus'

[Asia Economy Reporter Eunbyeol Kim] An analysis has emerged that the U.S. economy continues to show rapid recovery in the second half of the year, increasing medium- to long-term inflationary pressures.

On the 4th, the Bank of Korea stated in its 'Overseas Economic Focus' publication, "The core PCE price in the U.S. is expected to maintain a strong upward trend until early next year due to robust consumption growth and other factors." The forecasted inflation rate for the U.S. this year based on core PCE is 3.0%, according to the Federal Reserve's (Fed) projections. Inflation is also expected to exceed 2%, reaching 2.1% next year.

The Bank of Korea added, "If the high inflation trend persists longer than expected, there is concern that the recently rising inflation expectations could become entrenched at a high level, acting as a medium- to long-term inflationary pressure."

Recently in the U.S., prices of items excluding those related to temporary sharp increases such as economic reopening and raw material supply instability are also rising rapidly. The trimmed CPI, which excludes temporarily volatile price items, recorded 4.8% in May, the highest level since July 2008 (6.5%).

Some investment banks (IBs) are paying attention to the high growth rate of Owner’s Equivalent Rent (OER) since May. The recent surge in housing prices is attributed not only to temporary factors such as the expansion of remote work due to the COVID-19 pandemic but also to structural factors like housing supply shortages. Therefore, the rise in household housing costs could act as a medium- to long-term inflation factor. The median home price growth rate increased from 16.5% in March to 22.2% in April.

Inflation expectations are also rising. The short-term inflation expectations based on consumer surveys by the Federal Reserve Bank of New York reached 4.0%, the highest since the survey began in 2013. The May expert inflation expectations, which are less sensitive to price variable movements, also rose to 2.2%, the highest in 10 years.

The prolonged job seeker advantage in the U.S. labor market is causing labor shortages, which in turn is putting upward pressure on wages. The Bank of Korea stated, "The recent intensification of labor shortages observed in the labor market may spread to broader wage increase pressures." Although the overall labor market supply-demand imbalance has not yet led to general wage increases, some sectors with a high proportion of low-wage workers, such as the food service industry, may see actual price increases.

The Bank of Korea concluded, "Market participants generally agree with the Fed's projection that the inflation surge this year will be temporary, but concerns are growing that potential inflation risks could materialize, leading to persistent high inflation."