🚨 US Tariff-Driven Inflation Concerns
Today Korean Economic News for Beginners | 2025.08.16
0️⃣ Walmart·P&G Price Increases Create Variables Ahead of Interest Rate Cut
📌 Despite July CPI Stability, Tariff Effects Begin to Show, Conflicting with September Big Cut Possibility
💬 The US July Consumer Price Index (CPI) growth rate stayed within expected ranges, increasing the possibility of a September interest rate cut. However, experts predict that the Trump administration's mutual tariff effects may begin to seriously impact consumer prices after retailers exhaust their inventories. Walmart has raised prices on toys and kitchen items, P&G has increased prices on detergent and diapers, and Nike has also adjusted prices on some products. The Federal Reserve has hinted at the possibility of a 0.5 percentage point 'big cut' at the September FOMC meeting, but if tariff-driven inflation becomes reality, adjusting the pace of interest rate cuts will be unavoidable. The Bank of Korea is also reconsidering its October interest rate cut timing, taking into account US interest rate trends and domestic real estate and inflation situations.
1️⃣ Easy to Understand
While stable prices in the US have increased the possibility of lowering interest rates, there are also growing concerns that tariffs could cause prices to rise. This could also affect Korea's interest rate policy, making it worth watching.
Let's first look at the US price situation. The July Consumer Price Index (CPI) rose 2.9% compared to the previous year, recording a level similar to expectations. This signals that prices are showing stability, meaning the US central bank (Federal Reserve) has room to lower interest rates.
Lowering interest rates means it becomes easier to borrow money. When you get a loan from a bank, you pay less interest, so it becomes easier for individuals and companies to borrow money for spending or investing. This has the effect of improving the economy.
In fact, markets are even discussing the possibility of a 'big cut' - lowering interest rates by 0.5 percentage points all at once at the September Federal Open Market Committee (FOMC) meeting. Usually, interest rates are adjusted little by little by 0.25 percentage points, but 0.5 percentage points is quite a large reduction.
But here's where a problem arose. President Trump imposed tariffs on China and several other countries, and import prices began to rise. Tariffs are taxes placed on goods brought in from foreign countries, and when these taxes increase, product prices rise accordingly.
Initially, companies tried to bear this burden themselves. They sold their warehouse inventory first while not raising prices. But as inventory ran low, price increases became unavoidable.
Large retailers like Walmart have already raised prices on toys and kitchen items, and P&G has increased prices on detergent and diapers. Nike has also adjusted prices on some sneakers and clothing. If these price increases become widespread, prices could rise again.
This creates a dilemma for interest rate policy. They want to lower interest rates to boost the economy, but if tariffs cause prices to rise, they can't carelessly lower interest rates. If they lower interest rates while prices are rising, inflation could become even worse.
Korea faces the same dilemma. When the US lowers interest rates, Korea often follows suit, but with domestic real estate prices rising, it's difficult to make decisions easily. Originally planning to lower interest rates in September, there's now talk of postponing it to October.
Ultimately, the current situation is a complex phase where policies to boost the economy conflict with policies to stabilize prices.
2️⃣ Economic Terms
📕 Consumer Price Index (CPI)
The Consumer Price Index measures price changes in goods and services that ordinary consumers buy.
- It calculates the combined prices of everything needed for daily life, including food, housing, transportation, and medical costs.
- It's expressed as a year-over-year growth rate, which is exactly the 'inflation rate.'
- It's one of the most important indicators central banks look at when deciding interest rate policy.
📕 Big Cut
A big cut means a central bank dramatically lowers the base interest rate by 0.5 percentage points or more all at once.
- Usually interest rates are adjusted little by little by 0.25 percentage points, but in very bad economic conditions or emergency situations, they make large cuts.
- The economic stimulus effect is large, but inflation risks also increase.
- It's mainly used in dramatic situations like the 2008 financial crisis or the 2020 COVID-19 pandemic.
📕 Tariff Pass-Through
Tariff pass-through is when companies transfer the burden of tariffs imposed on imports to consumers through price increases.
- Initially, companies absorb the tariff burden by reducing profits, but in the long term, it leads to price increases.
- When there's a lot of inventory, price increases are delayed, but after inventory is exhausted, real price increases appear.
- Ultimately, consumers bear the real burden of tariffs, leading to higher living costs.
📕 Federal Open Market Committee (FOMC)
The FOMC is the highest decision-making body of the US Federal Reserve System, determining US base interest rates.
- It meets 8 times per year and comprehensively reviews economic conditions to decide interest rate policy direction.
- FOMC decisions greatly influence financial markets worldwide and also affect other countries' central bank policies.
- Policy intentions are communicated to markets through statements and chairman press conferences after meetings.
3️⃣ Principles and Economic Outlook
✅ Delayed Effects of Tariffs and Inflation
Let's analyze the process and timing of how tariff imposition is actually reflected in consumer prices.
First, there's a time lag in tariff pass-through. While the Trump administration imposed high tariffs on Chinese products, initially this wasn't immediately reflected in consumer prices. This was because importers and retailers used existing inventory to delay price increases as much as possible. In Walmart's case, they had 2-3 months of inventory, allowing them to maintain existing prices in the early stages of tariff imposition. However, as inventory was exhausted, they could no longer avoid reflecting tariff burdens in the prices of newly imported products.
Second, companies' initial response strategies reached their limits. In the early stages of tariff imposition, companies tried to absorb tariff burdens by reducing profit margins. They also attempted to reduce costs through renegotiation with suppliers or change suppliers to other countries with lower tariff rates. However, these methods also had limits, ultimately making consumer price increases unavoidable. P&G stated, "It's difficult to maintain current prices any longer due to increased raw material costs and tariff burdens."
Third, if price increases become widespread, they could expand into broad inflation. Currently, price increases are only appearing in some items, but because tariff-targeted items are extensive, ripple effects are expected to be large. Particularly in fields where Chinese products have a high proportion, such as clothing, electronics, furniture, and toys, chain price increases are likely to occur. The Brookings Institution analyzed that "if tariff-driven price increases become widespread, CPI growth rates could rise an additional 0.3-0.5 percentage points."
Given the delayed nature of tariff inflation effects, price pressures are expected to increase over the next few months.
✅ Interest Rate Policy Dilemmas and Choices
Let's examine the policy dilemmas the Federal Reserve faces and possible options.
First, they must find a balance between economic stimulus and price stability. Currently, the US economy shows signs of employment market slowdown and consumption contraction, requiring economic stimulus. The July unemployment rate rose to 4.3%, and retail sales growth rates are also slowing. In this situation, economic stimulus through interest rate cuts is needed. However, if tariff-driven inflation pressure becomes widespread, hasty interest rate cuts risk accelerating price increases. The Federal Reserve acknowledged this is "a complex situation requiring simultaneous consideration of economic slowdown and inflation risks."
Second, they must manage the gap between market expectations and policy reality. Currently, financial markets assign about a 40% probability to a 0.5 percentage point cut at the September FOMC. However, if tariff-driven inflation becomes widespread, the Federal Reserve may find it difficult to cut rates as aggressively as markets expect. In this case, market disappointment risks leading to stock declines or bond yield increases. Federal Reserve officials emphasize "careful, data-based approaches" while being cautious about premature expectations.
Third, they must consider interactions between tariff policy and monetary policy. Tariffs essentially have the character of supply shocks, making them difficult to address with monetary policy. Raising interest rates to suppress tariff-driven inflation could further contract the economy, while lowering rates to stimulate the economy could accelerate inflation. The Federal Reserve stated, "We will tolerate one-time price increases due to tariffs but manage to prevent this from leading to rising inflation expectations."
The Federal Reserve is required to perform high-difficulty policy management, maintaining fine balance between economic support and price stability.
✅ Effects on Korea and Response Plans
Let's analyze how changes in US interest rate policy will affect Korea's economy and monetary policy.
First, changes in the Korea-US interest rate gap will affect capital flows and exchange rates. If the US lowers interest rates, the Korea-US interest rate gap narrows, making dollar investments relatively less attractive. This could act as a factor for won strengthening, creating burdens for export companies but potentially easing import inflation pressure. Conversely, if the US slows interest rate cuts due to tariff-driven inflation concerns, Korea will also have to be cautious about interest rate cuts. The Bank of Korea stated, "We are closely monitoring the effects of US monetary policy changes on domestic capital flows and exchange rates."
Second, the domestic real estate market and price situation are becoming constraining factors for interest rate policy. With Seoul apartment prices showing upward trends again recently, concerns are raised that hasty interest rate cuts could fuel real estate speculation. Additionally, domestic prices are exceeding the target (2%) due to agricultural and service price increases, requiring a cautious approach to interest rate cuts. The Bank of Korea's position is to "operate interest rate policy within ranges that don't harm domestic macroeconomic stability."
Third, direct effects of global trade disputes on Korea's economy must also be considered. Trade disputes between the US and China could affect Korea's major trading partners, worsening export conditions. Particularly, Korea's major export items like semiconductors, automobiles, and petrochemicals are likely to be affected by global supply chain reorganization. In such situations, economic stimulus through interest rate cuts may be necessary, but policy efforts to strengthen structural competitiveness must also be pursued simultaneously. The government explained, "We are preparing economic resilience strengthening measures in preparation for global uncertainties."
Korea needs balanced policy management that comprehensively considers external condition changes and domestic economic situations.
4️⃣ In Conclusion
US tariff-driven inflation concerns are emerging as important variables that could influence global monetary policy direction, going beyond simple price issues. With the initially expected pace of interest rate cuts likely to be adjusted, new concerns have arisen for monetary policies in various countries including Korea.
The key point is that delayed effects of tariffs are now beginning to appear in earnest. Price increases by major companies like Walmart, P&G, and Nike may be just the tip of the iceberg. While companies have endured by using inventory and reducing margins, they have now reached their limits. Consumer goods price increases are expected to become widespread over the next few months, significantly affecting CPI.
The Federal Reserve's dilemma is also deepening. While economic stimulus is needed due to employment market slowdown and consumption contraction, aggressive interest rate cuts become difficult if tariff-driven inflation becomes reality. Gradual cuts are more likely than the 'big cuts' markets expect. This could lead to market expectation adjustments, raising concerns about increased volatility in stock and bond markets.
Korea faces an even more complex situation. If US interest rate cuts are delayed, Korea will inevitably face constraints in interest rate policy. With domestic real estate price increases and inflation pressure added, the possibility of September interest rate cuts is decreasing. October cuts are likely to be postponed, and even those could be further delayed depending on external conditions.
In such situations, policy consistency and predictability become even more important. Rather than reacting excessively to rapidly changing external conditions, stable policy management centered on domestic economic fundamentals is needed. Additionally, for structural problems that cannot be solved through interest rate policy alone, responses through fiscal policy and structural reforms must also be pursued.
Ultimately, tariff-driven inflation is likely to become a medium to long-term challenge rather than a short-term phenomenon. Policy authorities in each country must acknowledge the limits of monetary policy and seek fundamental solutions through supply chain diversification and structural competitiveness strengthening.
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