(The opinions expressed here are those of the author, a
columnist for Reuters.)
By James Saft
March 10 Emerging markets may soon become a
source of global inflation rather than deflation.
The main question is if this happens through the fire of
trade barriers or the ice of demographics.
The integration of China, India and the former Soviet bloc
into the global economy since the 1980s has provided a profound
deflationary shock, effectively doubling the global labor pool.
China's integration into a complex web of global supply chains
notably happened at the same time as tariffs were minimized or
eliminated, allowing Western consumer goods to be manufactured
using less-expensive Chinese and other Asian labor.
Yet China, its aging population the result of the
now-rescinded one-child policy, is well past the point at which
its supply of new labor exceeds demand, with new urban workers
falling short of demand continuously since 2011. The movement of
production out of China into less-expensive Asian and Indian
locales has been widespread, but the impact of any price rises
globally has perhaps been masked by falls in commodities costs
in recent years.
"A shrinking labor force and population aging in China will
bring inflationary pressures,” Christophe Donay, head of asset
allocation and macro research at asset manager Pictet, wrote in
a note to clients. "As labor costs continue to rise and
commodity prices are lifted from their previously depressed
levels, higher inflation will eventually come.”
A 2015 study by Mikael Juselius and Előd Takáts of the Bank
for International Settlements found that having a larger
working-age population in a given country tended to suppress
inflation, while having more aged and young dependents tended to
drive it higher.
Demographics alone may increase Chinese domestic headline
inflation by 25 percent in 2025 compared with its average in the
2002-2015 period, according to Pictet estimates. Although
Chinese inflation might be only 3 percent domestically in 2025,
the impact on global inflation could be considerable and
sustained, as there are few obvious pools of labor that could
easily and cheaply be substituted to play the role China has
over the past 25 years.
That's not a bad thing for China itself, which needs to
drive domestic wages higher to allow for the consumption share
of its economy to grow and leave it less dependent on
manufacturing and exports.
While demographics may well be destiny, and U.S. and global
inflation thus destined to be pressured higher, the great thing
about an aging population is that it happens slowly, giving
policymakers and businesses time to adapt.
THE FIRE THIS TIME?
The more urgent and potentially destructive danger is not
that emerging markets push prices higher slowly over time, but
that a new trade war cuts them out partially from globally
integrated supply chains, boosting prices rapidly.
Donald Trump won the presidency on a platform that accused
China, and others, of manipulating the global trade system to
its own advantage, hollowing out the U.S. economy and
Peter Navarro, his head of the White House National Trade
Council - and the author of a book called "Death by China" - has
evidently launched the administration's trade campaign, taking
aim this week at the "liberal trading order" under which we've
lived since the end of World War Two. Focusing, to the distress
of economists, on trade deficits, Navarro said the United States
should aim to "reclaim all supply-chain and manufacturing
capabilities that would otherwise exist if the playing field
At this point he is asking other countries to voluntarily
buy American to drive that unlikely transformation. But if he
and his president are actually serious about it, tariffs and
trade barriers will be involved.
Remember, average world tariff rates were 30 percent in the
early 1980s, spiking as high as 40 percent in the early 1990s
and then steadily declining to roughly 6 percent by 2010,
according to World Bank-derived data. Global inflation traced a
similar path, from as high as 30 percent in the 1990s to about
3.3 percent today.
What happened slowly on the way down may reverse rapidly on
the way back up, as the U.S. imposition of tariffs or a border
tax or other barrier leads to a tit-for-tat response by trade
partners. That could produce an inflation shock. Already
analysts are forecasting that a border tax would add $2,000 to
$2,500 to the average U.S. auto price, an increase of 6 percent
to 7 percent.
The Federal Reserve might "look through" that kind of thing
as a one-off increase in prices, but it is highly unlikely not
to contribute to a wage spiral, prompting sharp increases in
But investors, on the other hand, will be lucky if the ice
of demographics-caused inflation is their worst problem.
(At the time of publication James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at email@example.com and find more columns at blogs.reuters.com/james-saft)
(Editing by Dan Grebler)