Inflation Is Coming. Why it Could Be Here to Stay. - Barron's

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The U.S. inflation rate could be pushed higher over time by China’s number.

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In today’s global economy, what happens in one country can strike another one half-way around the world. A case in point: China, the United States and inflation.

The long-range outlook in the U.S is upbeat. Economists do expect inflation to rise to above 2% as more states reopen and then stay there. And the St. Louis Fed is forecasting a 2.35% rate for the next 10 years.

The bump will come as more Americans get their jobs back, or new ones, and they have places to go again — restaurants, stores, concerts. All of that spending will raise prices, which dropped last year because consumers held on to their cash.

But China’s economy has dynamics that could raise the U.S. inflation rate over time.

Key to the argument are China’s aging population and the value of the country’s currency, the Yuan.

First, age. Today, the average age in China is 38, the same as in the U.S. By 2040, though, the number skyrockets to 47 in China and dips to 37 here.

The shift means fewer Chinese workers and upward pressure on pay. Higher wages probably would cause Chinese manufacturers to raise prices of exports, which could be passed onto American consumers.

Now, the Yuan. The currency bottomed at 7.12 per dollar in late 2019 after a more than five-year down-trend. China wants a weaker currency so its exports are more competitive — cheaper — for global buyers. Since the end of 2019, the Yuan has risen to 6.50 per dollar. If the trend continues, U.S. importers might raise prices because the cost of their imports are higher.

“Over the next decade, Asia’s growth will slow dramatically, its wages will rise, its factories will close, its surpluses will melt and its currencies will rise sharply,” wrote Vincent Deluard, global macro strategist at StoneX in a note. “For the rest of the world, this will be a massive and unexpected inflationary shock.”

Americans, though, should know that China is just one factor in the inflation rate. Disinflationary drivers are also at play. E-commerce, for example, is likely to keep taking market share from traditional retail. That translates to consumers having a wide-open field of product options to choose from online, letting them choose the best prices and values.

If inflation does grow over the long term, interest rates would rise, lowering stock valuations. If the inflation is an effect of strong economic growth, earnings growth may offset the valuation decline. If not, inflation could hurt corporate profit margins or even economic demand.

But don’t worry about those possibilities right now. Just monitor them over time.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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