Why Bernanke might need India to do a China
Consumer prices in China rose at their fastest pace in a decade in August. Chinese manufacturers are now passing on their rising costs to US consumers.
By Agencies |
DELHI: Goldman Sachs Group economist Jim O’Neill wrote a paper last year, titled Globalization and Disinflation: Can Anyone Else ‘Do a China’? The full weight of that question is becoming evident now.
In their report, O’Neill and his team argued that China’s rapid urbanisation, industrialisation and rising openness to trade and capital flows had all contributed to keeping inflation in the developed world lower than expected for a decade.
The Goldman analysts said China would continue offering an inflation discount to the world with a nascent pickup in Chinese consumer prices and wages stabilising in 2007. “If we’re wrong and the Chinese inflation continues to rise, the consequences for the rest of the world may be profound,” the economists wrote. “The search, in terms of disinflationary forces, would be on to discover another China.”
Ben S Bernanke should take note. The Fed chairman and his colleagues on the open market committee cut interest rates 50 basis points last month. Expectations of a similar reduction during the two rate-setting meetings scheduled for 2007 are gaining ground, options prices show.
The Fed may have discounted the inflation threat; the market hasn’t. Barclays Capital has a gauge for how bond traders expect to be compensated for what they perceive to be future inflation. The 5-yearahead forward rate shot up as much as 20 basis points last month, before stabilising somewhat. To avoid a surge in consumer prices, Bernanke may end up needing India to produce the disinflation that China is no longer willing or able to export.
Not only did consumer prices in China rise at their fastest pace in a decade in August, there’s also growing evidence that Chinese manufacturers are able to pass on their rising costs to US consumers.
The US Bureau of Labor Statistics reported a 1.1% increase in the average US dollar cost of goods imported from China in August, the fourth straight month of accelerating price gains. There are several reasons why Chinese companies are pulling back their discounts.
Local wages are rising because of the increased cost of nutrition: Pork prices in China soared 87% from a year earlier in August.
The backlash against Chinesemade poisonous toys and inflammable clothes also suggests that China’s disinflationary potential is now running out. As consumers worldwide seek better quality in Chinese-made goods, and as regulators insist that manufacturers in that country do more to allay product-safety concerns, Chinese exports will get more expensive.
With China’ help, the George W Bush’ administration has managed to weaken the US dollar without importing inflation. Excluding 2005, the trade-weighted real broad dollar has fallen steadily since mid-2002. But the response of US import prices to the dollar’ fall “has been slow and apparently muted,” as a Federal Reserve study has pointed out. And while it’s difficult to pinpoint exactly what caused US import prices to stay resilient against adverse currency movements, the Fed study noted that those products in which China has upped its presence in the US have become more immune to exchange-rate shocks.
In their report, O’Neill and his team argued that China’s rapid urbanisation, industrialisation and rising openness to trade and capital flows had all contributed to keeping inflation in the developed world lower than expected for a decade.
The Goldman analysts said China would continue offering an inflation discount to the world with a nascent pickup in Chinese consumer prices and wages stabilising in 2007. “If we’re wrong and the Chinese inflation continues to rise, the consequences for the rest of the world may be profound,” the economists wrote. “The search, in terms of disinflationary forces, would be on to discover another China.”
Ben S Bernanke should take note. The Fed chairman and his colleagues on the open market committee cut interest rates 50 basis points last month. Expectations of a similar reduction during the two rate-setting meetings scheduled for 2007 are gaining ground, options prices show.
The Fed may have discounted the inflation threat; the market hasn’t. Barclays Capital has a gauge for how bond traders expect to be compensated for what they perceive to be future inflation. The 5-yearahead forward rate shot up as much as 20 basis points last month, before stabilising somewhat. To avoid a surge in consumer prices, Bernanke may end up needing India to produce the disinflation that China is no longer willing or able to export.
Not only did consumer prices in China rise at their fastest pace in a decade in August, there’s also growing evidence that Chinese manufacturers are able to pass on their rising costs to US consumers.
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The US Bureau of Labor Statistics reported a 1.1% increase in the average US dollar cost of goods imported from China in August, the fourth straight month of accelerating price gains. There are several reasons why Chinese companies are pulling back their discounts.
Local wages are rising because of the increased cost of nutrition: Pork prices in China soared 87% from a year earlier in August.
The backlash against Chinesemade poisonous toys and inflammable clothes also suggests that China’s disinflationary potential is now running out. As consumers worldwide seek better quality in Chinese-made goods, and as regulators insist that manufacturers in that country do more to allay product-safety concerns, Chinese exports will get more expensive.
With China’ help, the George W Bush’ administration has managed to weaken the US dollar without importing inflation. Excluding 2005, the trade-weighted real broad dollar has fallen steadily since mid-2002. But the response of US import prices to the dollar’ fall “has been slow and apparently muted,” as a Federal Reserve study has pointed out. And while it’s difficult to pinpoint exactly what caused US import prices to stay resilient against adverse currency movements, the Fed study noted that those products in which China has upped its presence in the US have become more immune to exchange-rate shocks.
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