INFLATION - NO LONGER A LONGSHOT
Given that the last significant inflation period was decades ago, it is not surprising that the marketplace has become convinced that a return to inflationary conditions is extremely unlikely.
Given that the last significant inflation period was decades ago, it is not surprising that the marketplace has become convinced that a return to inflationary conditions is extremely unlikely. In the wake of the subprime debacle, many economists suggested that a return of inflation would be decades in the making. But looking at current events, it would appear that a classic prescription for such a return has already been written and that it is coming to fruition quicker than many would have expected.
Cheap goods and cheap labor from China have been the primary deflationary impetus over the last 15 years, but the recent series of events suggests that China could become the inflationary spark in the futures. China continues to consume ravenous amounts of commodities as it modernizes and pushes toward an economy more reliant on domestic consumption. Business as usual on trade relations no longer seems acceptable by China’s largest trading partner, the United States. Consequently, both countries have launched into a cycle of tariffs that will not only raise costs to US and Chinese consumers but will also result in international prices rising to match the tariff-adjusted levels of Chinese and US goods. Increased raw material prices should lead to higher wholesale prices, higher retail prices, and should eventually put upward pressure on wages.
10 15 20 25 30 35 40
-10 -5 0 5
While trade tensions with the US are impacting soybeans, Chinese imports of major commodities remain strong well into the third quarter of 2018!
34.8
Furthermore, China has recognized the potential threat to their economy from the cycle of tariffs and is moving aggressively to expand infrastructure activity, which should add to wage pressures and to physical commodity demand. However, China’s ability to contain inflation has moved beyond its borders and has become difficult for them to control.
CHINA HAS RECOGNIZED THE POTENTIAL THREAT TO THEIR ECONOMY FROM THE CYCLE OF TARIFFS AND IS MOVING AGGRESSIVELY TO EXPAND INFRASTRUCTURE ACTIVITY.
Chart 1: Major Chinese Commodity Imports: January-August 2018 / Net Change from 2017 in % Terms
17.9 14.7 8.8 6.5 -2.1 -0.5 15.3
Soybeans
Iron Ore Source: China’s General Administration of Customs
Crude Oil
Veg Oil
Coal
Un. Copper
Copper Ore
Nat Gas
34 | ADMISI - The Ghost In The Machine | September/October 2018
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