China inflation hits American price tags (aka : China's latest export is inflation)

China's latest export is inflation. After falling for years, prices of Chinese goods sold in the United States have risen for the last eight months. Soaring energy and raw material costs, a falling dollar and new business rules here are forcing Chinese factories to increase the prices of their exports. The rise was a modest 2.4% over the last year. But even that small amount, combined with higher energy and food costs that also reflect China's growing demands on global resources, contributed to a rise in inflation in the United States. Inflation in the United States was 4.1% in 2007, up from 2.5% in 2006. American consumers could see prices increase by as much as 10% this year on specific products - including toys, clothing, footwear and other consumer goods - just as the United States faces a possible recession.

In the longer term, higher costs in China could spell the end of an era of ultra-cheap goods, as well as the beginning of China's rise from the lowest rungs of global manufacturing. Experts say that factory wages have risen 80% or more in many coastal areas in recent years, with the lowest wage about $125 a month. To reduce costs, some factory owners are considering moving to inland China, where wages are lower, or to other parts of Asia, like Vietnam and Indonesia. But while relocating production to cheaper countries could keep prices low for Western consumer goods, moving factories and complex supply chains is difficult. Such changes can take years and cost millions of dollars.

- This marks the end of China exporting deflation to the rest of the world. We have enjoyed the fruits of this deflation for many years, with cheap gadgets, toys, clothes, and everything, all of them stamped "Made in China". I have watched as the Great Factory of China employed its legions of workers, churning out goods sold at unbelievably lower and lower prices. I have watched as this Great Factory gobbled up more and more resources to feed its continued operations, as it drove all sorts of commodity prices higher, slowly at first, and then faster, and faster, to where we are now, with commodity prices setting new all-time record highs seemingly every other week if not every other day.

A couple of years ago, I started to hear reports coming in of Chinese workers demanding higher wages, in order to keep up with the tide of inflation driven by the ocean of dollars pouring in - payment for the flood of cheap widgets that were being exported by the container-load. A company director once told me that some of these Chinese workers were asking for 10% to 15% increments every year. I saw these two forces in collision - price deflation in finished goods versus price inflation in commodities and wages. One of these had to give. And so we see that, as published in the New York Times, deflation has given way to inflation.

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