U.S. Catching Chinese Inflation?
A recent Wall Street Journal article it was mentioned that Alan Greenspan believes that as a result of globalization we’ll encounter inflation in the US. With China experiencing major inflation problems, this is a definite possibility.
Greenspan’s view is grim with Ten-year Treasury yields, currently below 5%, projected to rise to “at least 8%” with the potential to go “significantly higher for brief periods.” Such movements would hurt the returns of stocks and bonds, making for a tough investing environment.
Is Chinese inflation a real concern? Yes.
Many seem to focus on the Chinese CPI numbers, but these measures are extremely misleading. One of the main components of the CPI is energy, but energy prices are set by the government, so price increases are not accurately reported. Other inputs are simply not given enough weight.
According to the BLS, in August, import prices from China rose .03% for the fourth consecutive month in a row.
China has raised interest rates every month, since March in order to combat their inflation at home.
A surplus of cash in China has pushed consumer prices at a level 2X the central bank’s target rate.
These factors all seem to indicate that the Chinese will soon have to allow the RMB to appreciate more, resulting in inflation carrying over to the U.S. A higher RMB versus the dollar will mean that our currency buys fewer Chinese goods, and we will have to spend more dollars to keep our consumption consistent.
This is more evidence to be bearish towards the dollar and focus on other currency pairs, such as the Euro.
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