US CPI Holds at 3.4%, Core Remains High, Sparking Stagflation Fears

Data released by the US Department of Labor on the 11th of this month showed that the year-over-year growth rate of the Consumer Price Index (CPI) for August remained at 3.4 percent, unchanged from the previous month. Although this increase has retreated from its peak compared to the same period last year, it still exceeds the Federal Reserve's (Fed) long-term inflation target of 2 percent, indicating that price pressures have not fundamentally eased. Notably, core CPI (excluding energy and food) also remained around 4.0 percent, suggesting that supply-demand imbalances and supply chain bottlenecks continue to impact the pricing foundation.

Since 2022, the Fed has implemented successive interest rate hikes to curb inflation, pushing the benchmark interest rate up from a low of 0.5 percent to the current range of 5.25 percent to 5.50 percent. Although the pace of rate hikes slowed slightly late last year, the market generally expects that, in the face of still-elevated price indices, the Fed may raise interest rates again at next week's policy meeting to prevent sticky inflation from rebounding. Another 0.25 percentage point rate hike would further raise real interest rates in the United States, exerting a more significant effect on suppressing demand.

Financial markets have reacted to this in advance. US Treasury yields edged higher prior to the release, and the short-term yield curve steepened, reflecting intensified investor expectations for future monetary tightening. The US dollar index also strengthened simultaneously, creating pressure on emerging market currencies. Analysts pointed out that if the Fed continues to raise interest rates, it could dampen corporate capital expenditure and consumer credit demand, further dragging down economic growth momentum and creating the risk of "stagflation."

Globally, changes in US interest rates often drive a reallocation of capital flows. A stronger US dollar pushes up the prices of commodities denominated in US dollars, particularly bulk commodities such as energy and metals, causing rising costs for countries with high import dependence. Conversely, appreciation of the US dollar also enhances the competitiveness of US export goods, yielding a temporary positive effect on the trade surplus. However, in the long run, if global demand is suppressed by rising capital costs, overall trade vitality will be weakened.

For Taiwan, US interest rate policies likewise exert a direct impact. US rate hikes are often accompanied by capital outflows, and Taiwan's foreign exchange market may face depreciation pressure on the New Taiwan Dollar, further driving up the costs of imported raw materials and posing challenges for manufacturing and energy-intensive industries. On the other hand, higher US interest rates also increase financing costs for Taiwanese enterprises in international markets; if the NT dollar exchange rate continues to weaken, the debt servicing burden for businesses will increase accordingly. The government and the central bank must closely monitor the trajectory of US monetary policy and adjust interest rate and exchange rate policies in a timely manner to maintain a balance between financial stability and economic growth.

Overall, although the August CPI did not hit a new high, it remains above the policy target, adding uncertainty to the Fed's future interest rate decisions. If next week's meeting confirms another rate hike, it will further elevate global capital costs, triggering chain reactions across emerging markets and the trading system. Market participants must find a balance between interest rate changes and inflation trends to avoid excessive economic volatility. (Source of facts: Central News Agency)