Yesterday, we told you about the Soc Gen research note “The China Domino has Fallen!” and its alarming conclusion that the world needs to expect significantly more inflation in the near term.
Included in that report is a rather complex, but explanative chart, on just why this is happening.
It displays the global supply and demand curve. While there are a great deal of variables at work here, the key, according to Soc Gen’s latest, is the expected surge in Asian consumers from China’s rebalancing.
From Societe Generale:
The major consequence of China’s policy response to the global financial crisis is that it is now engineering an outward shift in the global demand curve. Is there any reason to believe that the outward shift China engineers in the demand curve will be any less profound than the supply curve shift it engineered a decade ago?
We still find the global supply curve to be relatively inelastic. It is thus a most unfortunate paradox that the very policies China will use to rebalance its economy to more sustainable growth will ultimately export inflation to the rest of the world.
So as the demand curve moves out, due to millions of new Chinese consumers entering the market, the supply side remains stuck, pushing prices up for everyone.
[credit provider=”Societe Generale”]