The End of Cheap Chinese Goods
By FLOYD NORRIS
Published: October 21, 2011/ New York Times
Off the Charts: The End of Cheap Chinese Goods
The great Chinese-led deflation in goods prices may have come to an end.
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Interactive FeatureBeginning in the 1990s, the emergence of China as a major exporter first depressed and then held down the prices of many goods, helping to improve living standards in the United States. But recently, prices have begun to rise.
The change can be seen clearly in the accompanying charts showing the Consumer Price Index for apparel. Because prices can be volatile, they use three-month moving averages to smooth the trends.
The chart above shows how prices have moved over the last two decades, from the end of 1991 through the September figures released this week. Prices are still well below where they were in 1991, a performance that no one would have expected at the time. Over the previous two decades, beginning in 1971, that index doubled.
But in the last few months, the index has begun to rise at the fastest rate in many years. This spring, prices were still about 9 percent lower than in late 1991. Now the prices are just 5 percent below the level of two decades ago.
A second chart shows the 12-month change in the index. It is now up to 3.6 percent, the highest since 1992. Over the last six months, the three-month average has risen at an annual rate of 7.6 percent.
Prices for apparel were broadly steady for most of the 1990s, before beginning a sharp descent in 1998 that continued until 2003. Much of the decline was because of imports from China, which forced down prices and allowed Chinese suppliers to supplant companies from many other countries. The declines continued at a slower pace for several more years, but prices now appear to have hit bottom in 2007.
When Chinese trade was helping to push down prices for many things, the reported low figures for inflation gave optimistic central bankers a reason to think that there was no need to slow rapid growth in the United States.
The continued monetary stimulus helped push unemployment rates down to the levels of the late 1950s. The underlying assumption was that technological innovations had produced a new economy that could boom without inflation.
The alternative explanation was that a substantial part of the reported low inflation came from imports of Asian, primarily Chinese, products, and that that effect was bound to be temporary. At some point, trade imbalances would become unsustainable and the inflation picture would reverse, as either the dollar lost value or costs began to rise in Asia.
That is what appears to have happened. Labor costs are rising in China. Some business is going to other countries, where wage rates are lower than in China. And some product prices are rising.
The excessively easy monetary policy helped lead to bubbles in the American economy, first in technology stocks and then, much more damaging, in housing. There was substantial inflation, even when import prices were falling, but it was in other parts of the economy.
The third chart shows the United States balance of payments — largely determined by the trade surplus or deficit — as a percentage of the country’s gross domestic product. From a rough balance two decades ago, it deteriorated to a deficit of more than 6 percent of G.D.P. in 2006, before the economy began to stumble.
If the era of Chinese-led deflation has ended, the implications may be unfortunate for consumers, as the price of necessities rises even as the American economy continues to struggle along in a slow recovery from the recession of 2007 to 2009.
Floyd Norris comments on finance and the economy at nytimes.com/economix.
A version of this article appeared in print on October 22, 2011, on page
The Takeaways: investing in shirt and pant futures by going down to the department store and getting every piece of clothing you need before the prices go up even more isn't really going work if you keep gaining 8 pounds every year....
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