China's Inflation Problem Impacts U.S. Consumers

As costs go up in China, they charge more for products and that means Americans pay more. Over the past 12 months, prices of things the U.S. imported from China, are up 2.8 percent. But five years ago, the price of Chinese imports were actually falling. David Wessell, of The Wall Street Journal, talks to Renee Montagne about China's inflation.

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RENEE MONTAGNE, host:

So now to how inflation in China impacts Americans.

David Wessel is on the line. He's economics editor of The Wall Street Journal and a frequent guest on our program.

Good morning.

Mr. DAVID WESSEL (Economics Editor, The Wall Street Journal): Good morning.

MONTAGNE: Now, if prices in China keep going up, how precisely would Americans be affected?

Mr. WESSEL: Well, we'd pay more. Basically, for the most of the past decade, economic forces for abroad were pushing down prices in the United States. Millions of low-wage Chinese, Indian, Eastern European workers came into the global labor market. This competition reduced costs of stuff we bought. The pressure on U.S. firms was to get more efficient. It all added up to essentially importing falling prices from abroad.

In fact, you know, during the 2000s, there was worry at the Federal Reserve that we were importing deflation from China. But that's all changed. Instead, we're now importing inflation. You know, the wages of making things in China go up, they charge more, we pay more. So over the past 12 months, prices of things we imported from China are up 2.8 percent. That doesn't sound like much, but five years ago, the price of Chinese imports was actually falling. And over the past three months, prices have gone up at more than a five percent annual rate for stuff that we import from China. So it's going to boost the pressure on businesses like the Gap to raise prices here at home.

MONTAGNE: Yes, as we just heard. But David, could rising prices and wages in China have a positive effect in that it would be easier for U.S. companies to compete with China?

Mr. WESSEL: Well, I think the answer is yes, but. To the extent that we have American companies producing in America that directly compete with Chinese producers, yes. But more likely, what's going to happen is people who are making stuff in China and sending it to the United States are going to move that production to other parts of Asia, where wages are still very low, like Vietnam or Malaysia. And the Chinese will then try and make more sophisticated products ones that the workers who are more skilled and make more money can make, and that's the kind of products that we kind of specialize in the U.S. So it's unlikely to have a huge impact there.

INSKEEP: How does the whole issue of currency play into this? The U.S. has long complained about China's tight controls over its currency. Could Beijing's inflation problem change that?

Mr. WESSEL: In a word, yes. One reason the Chinese are having such trouble defeating inflation is that they won't let their currency go up, and they've kind of tied the hands of their central bank their equivalent to the Federal Reserve. China's growing too fast for its own good. Demand is outstripping the capacity to meet it. Prices and wages are going up. Looks like they got a little bit of a property bubble going, too.

In the textbooks, one way to fight that is your currency goes up, that makes your exports more expensive. It's kind of a break on your economy. It makes the stuff you import cheaper. It all helps to bring inflation down. But they won't let that happen, in part because their export industries are so politically powerful and employ so many people, they're resisting that.

Now what we hear from the Chinese, that they are serious about letting the currency rise over time. The question really is: Are they going to let it rise fast enough to stop inflation from getting worse, or will their reluctance to let the currency rise make their battle against inflation much harder to win?

MONTAGNE: David Wessel, always good to talk to you.

Mr. WESSEL: You're welcome.

MONTAGNE: David Wessel is economics editor of The Wall Street Journal.

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