With China Inflation Above 7%, Rising Costs Move To US

Inflation in China during the month of June was "only" 7.1%. That was slightly better than the two months before, but, according to Reuters, "consumer prices were 7.9 percent higher than a year earlier — well above the government’s official full-year target of 4.8 percent."

China’s inflation problem may be the most serious potential cause of stagflation in the US. The American economy is already slowing and many economists believe that GDP growth will be negative in the third and fourth quarters.

The recession may be bad, but the extent to which it can be weathered depends a great deal on whether inflation is "imported" from abroad. Abroad mostly means China since such a large portion of US goods from overseas come from the world’s most populated country.

China’s economy presents it with problems which it may not be able to solve, at least for now. Rising oil and commodities prices appear to be hitting it worse than in most countries. With a rapidly rising GDP, local personal income is going up, allowing manufacturers to charge the typical consumer there more. But, if passing along the costs of raw material could be limited to China, the demand for its exports would not be at risk.

The US consumer is already paying an historically high price for gas. Commodities costs are getting close.If the products coming into Wal-Mart (WMT) costs a good deal more because Chinese prices are rising, Americans have no where to go for inflation shelter.

China does not have a stagflation problem yet. For now, it is sending the potential for that trouble overseas to places like the US. But, when sales of its products begin to wane, the issue becomes global.

Douglas A. McIntyre