China’s producer price index moved up over 10% last month. According to MarketWatch, this is the largest increase since 1996. This level of inflation makes it almost certain that China can no longer be the low-cost producer that it has been for over a decade. There is no escaping that by trying to get exports from other developing nations. None is large enough to shoulder the load.
Many of America’s largest companies rely on China for a substantial portion of their goods. Wal-Mart (WMT) is a prime example. The world’s largest retailer imported $27 billion in products from China in 2006.
Inflation in the US is already being driven by high crude prices and a spike up in the cost of agricultural commodities. In recent weeks, the pressures from these sectors has waned. That has given rise to the hope that increasing prices can be undercut and the Fed can hold off increasing interest rates.
The central government in China can do very little to stanch inflation. It created its own middle class because it need trained workers to build its export economy. That economy runs on oil. The new group of relatively affluent Chinese are voracious consumers just as they are in any country.
Because China cannot turn back the clock to a period when it was not a consuming nation, it cannot control the rising price of goods and services within it own boarders. It cannot underwrite losses at its big exporters, so they will have to export inflation to keep their margins.
The hopes for a slowing growth in prices in the US may depend more on China than it does on OPEC.
Douglas A. McIntyre
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