We spotted the following article on page A1 of today's Wall Street Journal, "Change In China Hits US Purse." The Journal is reporting that prices of imported goods are climbing, becoming a source of inflationary pressure. In particular the Journal notes that rising import prices will becoming a bigger presence in US inflationary trends as Chinese workers and others in emerging markets win higher wages and also become eager domestic consumers. There is little doubt that the inflation picture is changing in China, but how big is this story for inflation in the
developed world? We will kill the suspense up front: in all likelihood the impact on inflation in the developed world is small.
Chinese labor costs are a relatively small part of US retail prices. If the assembly cost rises 20%, and all of the cost increase is passed through, the retail price would rise only 0.2%. Of course, there may be other indirect Chinese labor costs: some of the components made by foreign companies or that are not assigned to a specific company may come from China. Overall, rising inflation is an important concern in emerging markets. And emerging markets are affecting headline inflation in the developed world through oil and other commodities. However, the pass through of rising core and wage inflation in the emerging markets is likely to have a small impact on developed world inflation