The Asia Report is supported by Cathay PacificThe era of Asia exporting deflation to the western world may be at an end, and as a result inflation may be about to rise in the U.S., according to Societe Generale’s Aneta Markowska.
While for the past 15 years, Asian manufacturers (notably China) have been exporting low cost goods to the U.S., higher wages and commodity costs are starting to put pressure on export prices, making goods coming to the market in the U.S. more expensive, according to Markowska.
But it’s not just about the pass through from China, according to Markowska:
While Chinese imports make up a very small portion of overall US consumption (<5%), there seems to be a reasonably good relationship between Chinese inflation trends and US core goods prices (r-squared of 0.54). This seemingly, exaggerated impact is simple to explain: US domestic producers of consumer goods are competing heavily against China’s low cost manufacturers. To the extent that Chinese import prices begin to rise, this gives US producers a bit more pricing power. These knock-on effects take a while to materialise, hence the 20-month lag between Chinese CPI and US core goods CPI (the lag to US import prices from China is much shorter, at just 4 months).
While inflation expectations are rising now, real prices increases will lag. Markowska warns though that Fed is unlikely to act anytime soon because they are still estimating a low natural rate of unemployment.
Even if the scenario of imported inflation materialises in 2012, the Fed is unlikely to act pre-emptively. This requires an assumption of a much higher NAIRU than the Fed is currently assuming (5%-6%). Therefore, we believe that the Fed will only respond once upside pressures begin to show up in wages or in inflation expectations.
Note the potential shift in Asia’s inflationary role in the U.S. economy.
Photo: Societe Generale