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The US and China: A Tale of Two Inflations, US consumers this summer pay $28 for a takeout salad and $68 for a seasonal barbecue
By Enda CurranJuly 10, 2023 at 11:45 PM GMT+8
While US consumers this summer pay $28 for a takeout salad and $68 for a seasonal barbecue, their counterparts in China are facing the opposite challenge: too little inflation.
Consumer prices in China were flat in June and factory-gate prices fell further, prompting economists to warn of deflation. (Falling prices might sound good, but they raise a host of thorny issues.) The tepid readings are part of an emerging story about how China’s hugely anticipated post-Covid Zero rebound has largely disappointed. Instead of revving up consumer spending at home and driving demand for overseas goods and services, the world’s second largest economy appears to have fizzled only months after exiting its pandemic era hiatus.
What this means for the rest of the world isn’t clear. A hopeful argument is that weaker prices in China, especially at the factory gate, will take pressure off the cost of goods globally given the nation’s role as the world’s biggest manufacturer. But this view is contested because of the variables in how costs are absorbed across the production and supply chain.
On the other side of the Pacific, American inflation remains stingingly high, in part because of an economy that continues to defy forecasts for a steep downturn.
Data on Wednesday is expected to show annual headline inflation may fall as low as 3.1%. Although that’s a long way off the 9.1% highs hit in the middle of 2022, much of the drop will reflect base effects for energy prices. The real story will lie in core inflation and for the costs of essentials such as rent and auto or health insurance, which is why the Federal Reserve is warning that borrowing costs need to go higher.
The stark inflation divergence between the world’s big two economies reflects the zeitgeist, as both powerhouses deepen their rivalry and push in opposite directions. After initially containing the spread of Covid-19, China’s economy enjoyed a strong performance in 2020 and 2021 while its major rivals floundered in response. That changed in 2022 when China’s dogged pursuit of Covid Zero backfired on the economy, leaving it scrambling to catch up with a world that had already moved on. The division only widened this year as the US economy continued to hold up well while China fell into a renewed slump.
US Treasury Secretary Janet Yellen said last week during her visit to Beijing that competition between the countries isn’t a “winner-takes-all” situation. In response, China’s No. 2 official, Premier Li Qiang, said he believed that bilateral ties would eventually see a “rainbow,” after going through a period of “wind and rain.”
On the inflation front at least, US consumers are certainly hoping for a rainbow.
The US and China: A Tale of Two Inflations
Plus: Good business in stopping methane leaks.
www.bloomberg.com
