I had not even finished my first cup of coffee when the words leaped out at me from the bottom of the page. “The end of Cheap Chinese Goods,” it said, and the headline seemed to loom much bigger than its actual font size. I took a swig of coffee and read the first sentence: “The great Chinese-led deflation in goods prices may have come to an end.”
I settled down and read further. What I found was an article, despite the startling headline, that made a fairly reasonable case based upon the belief that China is rapidly losing its ability to produce goods at cheap prices. As a result, the deflation or at least the drag on inflation that resulted over the last twenty or so years is coming to an end. The author, Floyd Norris, puts it this way: “Labor costs are rising in China. Some business is going to other countries, where wage rates are lower than in China. And some product prices are rising.”
The author uses apparel to make his point and in studying apparel prices it is important to remember that cotton prices spiked late last year. Even so, with 85% + of the world's toys coming out of China, the point is well taken. The days of bottomless pricing in China are over. Get used to rising prices.
Below are some graphs which Norris uses to make his point:
The chart above shows how prices have moved over the last two decades, from the end of 1991 through the September figures released this week. Prices are still well below where they were in 1991…Over the previous two decades, beginning in 1971, that index doubled. But in the last few months, the index has begun to rise at the fastest rate in many years. This spring, prices were still about 9 percent lower than in late 1991. Now the prices are just 5 percent below the level of two decades ago.
I am not sure that focusing on the most recent figures is enough to validate Mr. Norris’ conclusion that we are seeing the near term end of cheap Chinese goods. I do think, however, that we should all prepare for that eventuality because, though it may not come sooner than later, it will come.