Thursday, February 21, 2008

China and inflation

Paul Krugman again weighs in on China and inflation.

Basically, he says that an increase in the price of Chinese goods is not sufficient to cause US inflation. The actual China cost is just a small percentage of a US price; transportation, overhead and so on form a greater percentage of the total cost of a good.

True. I think China's impact on US inflation is more indirect.

1) China has a huge demand for commodities. It's additional demand is causing the price of the supply to rise.

2) Commodities are priced in US dollars. With the dollar tanking, the price of dollar denominated goods will rise.

This combination will continue to be a nasty one-two punch on the US economy until either demand dries up (not likely) or the dollar strengthens, but it is hard to see how that will happen with interest rates so low and probably going lower.

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