For some time now we have been warning that the deflationary effect of Chinese imports could come to an end, and with it inflation will rise. When economists look at inflation they need to be able to separate one-offs from trends. A rise in the price of oil is not necessarily inflationary, and is only likely to lead to a sustained rise in prices elsewhere if producers pass on the extra fuel costs they pay and workers receive higher wages to fund their more expensive petrol. Indeed if neither of these things happen, a rise in the price of oil could actually be seen to be deflationary, as it helps reduce demand. Conversely, a fall in the oil price could be inflationary.
But then these arguments work both ways. Sure the high price of oil might not be inflationary, but equally, the fall in prices promoted by cheap Chinese imports could also be a one-off. If China starts moving up the value chain or if the yuan appreciates in value, forcing up the cost of Chinese imports, then inflation could set in.
We have been warning as much for some time, and this morning the FT published an interview with Sir John Gieve, the Bank of England’s Deputy Governor for Financial Stability. Sir John warned that “energy prices were a paradox”,since they reduced headline inflation but boosted demand. He also warned that: “It may well be that we’re coming to the end of quite a long period where goods prices were being driven down by globalisation and the absorption of China and India.”
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