Wachovia’s Special Commentary: Does Chinese Inflation Mean Higher U.S. Inflation?

Chinese CPI inflation has risen quite sharply lately, and the media is filled with stories of significant wage increases in China this year. In addition, the dollar has depreciated versus the Chinese renminbi lately. Because it seems like the United States imports “everything” from China, some investors fear that the overall U.S. CPI inflation rate will likewise head higher.

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Chinese CPI inflation has risen quite sharply lately, and the media is filled with stories of significant wage increases in China this year. In addition, the dollar has depreciated versus the Chinese renminbi lately. Because it seems like the United States imports “everything” from China, some investors fear that the overall U.S. CPI inflation rate will likewise head higher.

 

In our view, these fears are misplaced. Imports of goods from China account for, at most, eight percent of U.S. consumption expenditures on durable and nondurable goods, and imports of services from China are small. Because imports of goods and services from China represent only a small proportion of total U.S. consumer expenditures, rising import prices from China (and more broadly the entire world) have a relatively small effect on overall U.S. CPI inflation.

 

That said, the direction of change in import prices clearly does not help to bring down U.S. inflation. Although we expect the U.S. CPI inflation rate to decline as the economy weakens, inflation may not come down as quickly in this cycle as it has in past cycles.

 

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