Will US Inflation Pressure Ease After Q2?

Experts Forecast Stable Upward Trend in Inflation

[Asia Economy Reporter Hwang Junho] The pace of U.S. inflation, which is pressuring the global economy including South Korea's stock market, is gaining support for the view that it will stabilize after the second quarter. Although Federal Reserve (Fed) officials continue to make hawkish remarks, the expectation is that inflation will follow a steady upward trend rather than a sharp rise. However, experts believe that even if the inflation rate slows down, the stock market will continue to show sluggish performance. In this context, the sectors to watch are consumer goods, shipbuilding, transportation, and banking.

Park Sung-woo, a researcher at DB Investment & Securities, stated on the 21st through an economic policy scenario based on inflation trends, "Among macro scenarios such as Goldilocks, inflation, deflation, and stagflation regarding inflation and growth rate paths, there is a high possibility (40%) that a certain level of ‘inflation (annual consumer price index of 7.0?8.0%)’ will persist." He added, "Last month’s inflation passed its peak, and despite ongoing supply-demand mismatches, this situation is likely to continue until the end of the year." This outlook follows the U.S. Consumer Price Index (CPI) reaching an 8.5% peak, the highest in 40 years, with expectations of a slowdown in pace. He explained, "The annual CPI will maintain a level of 7.0?8.0%, and the Fed will continue to implement a certain level of interest rate hikes."

Um Dong-min, a researcher at Kyobo Securities, also said, "We expect inflation to be curbed after the second quarter of this year," adding, "Although a global economic slowdown has been underway since the end of last year and a temporary recession may occur next year, it is reasonable to assume a predictable soft landing scenario." According to the Bloomberg consensus on U.S. CPI, the inflation rate is expected to sequentially ease from 8.0% in the first quarter to 7.6% in the second quarter, 6.8% in the third quarter, and 5.7% in the fourth quarter.

Even if inflation enters a stabilization phase, the domestic stock market is expected to continue its sluggish trend. Kwak Byung-yeol, a researcher at Leading Investment & Securities, analyzed, "Looking at the inflation slowdown phase that follows a prior sharp rise in international oil prices, the current correlation between international oil prices and consumer prices is estimated to have dropped to a historical low (-0.7) and is now entering a point seeking reversal." He added, "Historically, during such phases, the KOSPI generally showed a neutral level of response." This can be interpreted as reflecting a certain level of stabilization in operating profit margins due to easing raw material cost burdens. Researcher Kwak pointed out, "Similar phases occurred in 2005 and 2011, and the sectors that commonly responded in stock prices during those times were consumer goods, shipbuilding, transportation, and banking."

However, considering the hawkish remarks from Fed officials, the possibility of accelerating inflation cannot be ruled out. Researcher Um said, "If inflation continues to accelerate, the top policy priority will be inflation control despite pressures from economic slowdown and recession," adding, "In such a case, a ‘Minsky moment’?a sharp market price drop caused by increased asset sell-offs?may occur, leading to a ‘deleveraging’ cycle where debt and credit shrink." He further identified vulnerable economic agents in a debt crisis as including the U.S. federal government, fiscally weak European countries, emerging market companies such as those in China, and households facing marginal situations.