'Shutdown' masks US inflation warning

MarketPRO Column

Releases of employment·retail sales delayed

Closely watching global bond market trends

The US federal government shutdown (temporary work stoppage) has continued for more than 20 days. Releases of key indicators to be checked before the Federal Open Market Committee (FOMC) on the 28th–29th, such as employment and retail sales, have been delayed. With it difficult to verify indicators, the global bond market has been moving up and down, focusing on remarks from Federal Reserve (Fed) officials.

Fed officials have made clear that balancing employment and inflation risks is important. The common view is that price risks remain but are not at very high levels, so attention should be paid to employment risks. The core Consumer Price Index (CPI) (excluding volatile food and energy) has risen by about 0.3% month-over-month in recent months. By contrast, nonfarm payrolls increased by only 29,000 month-over-month on a three-month average basis. In the first quarter of this year, monthly job gains averaged 111,000.

A 25bp (0.25% point) cut in the policy rate is expected at this FOMC, as the Fed is likely to respond to a deterioration in the labor market.

A recent report from the Peterson Institute for International Economics confirmed that price increases for products commonly used in US households have been substantial. Retail prices for furniture, home appliances, and clothing rose by more than 5% compared with before tariff imposition. They all share a high proportion of imports from China. However, retail price increases for food and alcoholic beverages were relatively low.

If the current trend continues, US firms are expected to further pass on the additional cost burden of core goods with high import shares to consumers by year-end. This is why most Fed officials continue to be wary of the inflation upside risk from tariff burdens.

Services have a greater impact on the price index than goods. The rate of increase in service prices has been widening, since rises in commodity prices and other cost increases inevitably get reflected. For example, price increases for auto services, air fares, and public transportation in the CPI are growing.

The problem is that from October new tariffs have been imposed on items such as pharmaceuticals at 100% and furniture at 30%. These are items with a high pass-through to consumer prices. It should be noted that additional tariffs are increasing upward pressure on inflation.

Min Ji-hee, bond analyst at Mirae Asset Securities