Importing trouble

While a falling U.S. dollar is a chief cause of inflation, China may become its real source

Economic doomsday types who predict a coming era of out-of-control inflation usually point to the sinking U.S. dollar as one of the chief culprits. (A falling dollar means it costs more to buy goods, and purchasing power falls.) But they may be worrying about the wrong problem. According to data from the Federal Reserve, the impact of a weak U.S. dollar on import prices has in fact been steadily declining from the 1980s into the early 2000s. This is in large part because China dominates the U.S. import market, and Beijing keeps the yuan fixed against the dollar. The peg erases the effects of currency fluctuations on imports from China, which is why core inflation didn’t rise much even as the dollar lost value. (The dollar’s weakness, in turn, has guaranteed low price tags for Chinese products across the globe, dampening inflationary effects worldwide.)

Now, though, that lid on prices appears to be coming off, and China may become the real source of inflation in the U.S. and elsewhere. From Jiangsu to Guangdong, the country’s most industrialized provinces are experiencing double-digit wage hikes. When auto workers in southern Guangdong went on strike last year demanding higher pay, local companies and foreign manufacturers got a taste of what’s to come as younger and more outspoken workers enter the labour market. Also, China’s labour force is shrinking. The results of the latest population census, conducted in 2010, show that China’s replacement rate is already below the average of the United States, the United Kingdom and France, and on par with countries such as Italy and Japan. Employers in China are already struggling to find new hires. Rising prices are also the product of Beijing’s attempts to stimulate domestic demand, and diversify the economy away from exports.

All this means that “we have moved from an era of easy deflationary environment to one of inflation,” development economist Jeffrey Sachs told the Wall Street Journal. From sneakers to barbecue sets, there soon may be no more cheap, made-in-China consumer goods to help the West keep inflation in check. Higher prices, then, could indeed be on the horizon for the U.S. (and the rest of the world). But that may be regardless of the dollar’s recent misfortunes.

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