US inflation cooled sharply last month, with the consumer price index (CPI) rising 3 percent year-on-year last month, down from 4 percent growth the previous month, and the slowest rate since March 2021, the US Bureau of Labor Statistics reported last week. The core CPI — which excludes food and energy prices — also rose at a slower-than-expected pace, increasing 4.8 percent last month, compared with 5.3 percent expansion in May. It was the first time that the rate has been below 5 percent since November 2021.
At 3 percent last month, US consumer price inflation is now just one-third of the level it was a year earlier, which is good news for consumers, markets and the US Federal Reserve. While the latest CPI report might not be strong enough to stop the Fed from going ahead with an expected interest rate hike at the upcoming Federal Open Market Committee meeting this month, it does fuel speculation about whether the Fed would pause its hikes for the rest of the year.
Global prices of crude oil, agricultural products and specific commodities soared last year due to Russia’s war in Ukraine, triggering a global inflation crisis. Many countries have responded with aggressive interest rate hikes to curb inflation, although that has also put pressure on their economies.
However, recent data suggest that the world seems to have left the worst inflation behind. For instance, consumer prices rose by 5.5 percent last month in the eurozone, down from a 6.1 percent increase in May and the lowest level since January last year, Eurostat said.
Turning to Asia, consumer inflation in China was flat at zero last month, the lowest in two years and four months, while South Korea’s CPI rose 2.7 percent last month from a year earlier, compared with a 3.3 percent increase recorded in May. Taiwan’s CPI last month rose 1.75 percent from a year earlier, the first time in a year and 11 months that headline inflation fell below the central bank’s 2 percent target. Meanwhile, data from the Philippines and Indonesia also showed that consumer inflation continued on a downward trend last month.
As inflation is cooling in various countries, central banks around the world, led by the Fed, are expected to be less hawkish about monetary policy decisions, and could be very near the end of their rate hike cycles. This situation is conducive to a worldwide economic recovery and is good news for Taiwan, as the economy is highly dependent on foreign trade, whereas stable prices are conducive to the country’s export competitiveness. Moreover, with less pressure to raise interest rates in the US and elsewhere, Taiwan’s financial markets would also become more stable and could attract more capital inflows.
Despite the seemingly cooling inflation, observers are still focused on wage changes and the labor market’s dynamics of supply and demand, as policymakers would want to avoid a repeat of the stubborn wage-price spiral of the 1970s that only unwound following a deeper recession afterward. This fear of a wage-price spiral is rational, as the impact of the COVID-19 pandemic and falling population growth have adversely affected the labor force. The global service industry now faces the severe problem of a labor shortage, and the lack of workers is pushing up wages. If wage increases outpace productivity growth, it could cause a wage-price spiral and negatively affect the economy.
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