Gradually starting from early 2021, the global economy has been struck with the towering impact of rising inflation. However, across the Pacific Ocean, the United States (U.S.) has witnessed inflation of worrying extent, leading to drastic economic effects such as a hike in interest rates. Inevitably, the situation in the U.S. impacts every single country, heightening financial insecurities worldwide. Just as the coronavirus disease (COVID- 19) pandemic seems to be at its final chapter, another global economic threat has come knocking at the door.

U.S. inflation shockingly rose to a 9.1 percent annual rate in June 2022. Customer Price Index (CPI), which measures the monthly change in prices, showed the largest gain since the end of 1981 as reported by the U.S. Department of Labor. More specifically, core CPI (an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy which have relatively volatile prices) advanced 5.9 percent compared percent on average this year. This prospect will worsen housing problems especially for single-family homes, as the rate of interest charged on the mortgage is due to increase, putting an excessive burden on purchasers. Coincidentally, the amount of loans borrowed for housing, which consumers eventually must pay, will likely escalate. Unfortunately, purchasing necessities additionally has become an economic burden, as Dunkin’ and Starbucks witnessed a monthly year- over-year drop of 7.8 percent and 4.1 percent respectively, as written in Bloomberg. As inferred from current statistics, experts have predicted a bleak future of an 8.8 percent year-over-year increase in the U.S, also reported by Bloomberg.

The alarming inflation has intimidated consumers, affecting many price fields from housing to commodities. Following the figures from Reuters, U.S. housing prices are expected to have risen 10.3 percent on average this year. This prospect will worsen housing problems especially for single-family homes, as the rate of interest charged on the mortgage is due to increase, putting an excessive burden on purchasers. Coincidentally, the amount of loans borrowed for housing, which consumers eventually must pay, will likely escalate. Unfortunately, purchasing necessities additionally has become an economic burden, as Dunkin’ and Starbucks witnessed a monthly year- over-year drop of 7.8 percent and 4.1 percent respectively, as written in Yahoo Finance.

Tackling Inflation 
Both domestic and international affairs are speculated to have caused this inflation. As Professor Kang Minwook (Department of Economics) pointed out, the massive expenditure primarily by the U.S. Department of Treasury (USDT) during COVID-19 has resulted in the inflation. Although it is the government’s duty to circulate more money to avoid a financial crisis, an erroneous prediction from the U.S. economy departments, along with a failure of balance between the Federal Reserve System (the Fed) and USDT, has aggravated the situation. Besides, the limited supply of housing and increased labor costs are just some of the reasons for inflation. Internationally, with geopolitical factors such as the Ukraine- Russian War, food and fuel supplies have been cut down, further worsening supply limitations and overall inflation. 

To minimize inflation damages, The Fed is raising interest rates to slow demand and calm price hikes. According to TIME, The Fed policymakers have already decided on a second 0.75 percent increase in interest rates. As written in Marketplace, because of the rise in interest rates, the U.S. dollar is at one of its strongest peaks compared to the euro or yen. For the U.S., a decision to raise interest rates is a strategic move to mollify inflation. Professor Kang elaborates that increased interest rates curtail loaning from banks. In effect, the amount of money residing in the market reduces, which in turn strengthens the dollar’s value. As money circulation in the market dwindles, inflation can be alleviated. Nonetheless, the Fed is still under pressure to implement more aggressive measures to slow down the inflation rate, and the central bankers in June admitted the possibility that more restrictive policies could be approved if inflation seems to endure, according to CNBC. 

Global Ramifications of U.S. Inflation 

U.S. inflation is not just a condition confined within American borders, but that which highly affects the global economy. According to Reuters, financial conglomerates such as Goldman Sachs have already warned of an impending “Reverse Currency War.” Professor Jinill Kim (Department of Economics) mentioned that, to keep up with the acceleration of U.S.’s interest rate, other nations are also raising their own rate, which is a contrasting phenomenon to the normal ‘currency war’—hence the name reverse. Already the European Central Bank (ECB) has increased its key interest rate by 0.5 percent for the first time in more than 11 years, as reported by BBC. Nevertheless, the U.S.’s inflation is projected to have the most significant influence in developing countries. Also described by Professor Kim, developing countries are more prone to shifts in currency exchange rates, as a large portion of their industries rely on exports. In addition, since developing countries retain relatively less foreign funds in key currencies, the transfer of dollars from them to the U.S. will impinge more strongly. 

Korea may not be exempt from this inflation. As the Fed decided its raise of 0.75 percent, it surpassed Korea’s interest rate of 2.25 percent, reversing Korea-U.S. interest rate relations for the first time since February 2020. Stemming from this reversal, foreign funds may escape from the Korean stock and bond market, as foreign investors are less inclined to retain their money where interest rates are lower, according to Korea’s economic magazine Hankyung. Thus, to counteract a high possibility of domestic inflation and a loss of foreign funds, experts forecast the Bank of Korea (BOK) to raise its interest rates above 2.5 percent to three percent at the end of this year. 

Fortunately, BOK had anticipated the interest rate reversal, nullifying the economic shock. With preparations intact, a respondent in BOK assured, “There are not many emerging markets that are stable and maintain adequate interest rates like Korea. Although the reversal may pressure a leave of foreign funds, it is not expected to be a significant factor,” according to Hankyung. That being said, Korea needs to implement sufficient economic measures to calm soaring prices and upcoming global economic turmoil. More and more customers are adopting a “no-spending” tactic to survive the encumbering price toils. In order to deviate from stagnation, BOK needs to ascertain its economic policy directions.  

The dollar is a world-wide currency, meaning the U.S.’s economic deficits are ultimately endured by countries worldwide. The U.S.’s economic failure led to competitive interest rate policies, turbulent economic stances and concerning prospects. The U.S. and respective countries must implement appropriate measures to stop a reenactment of the 2008 global financial crisis.