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The Most Important Economic Statistic For Policy That Almost No One Knows

By / 9.20.2017

Everyone knows that Chinese wages have soared in recent years. Factory pay is up 64% since 2011, according to one source. The yuan-dollar rate was 6.38 on September 20, 2011, compared to 6.57 today, virtually no change.

So quick quiz. What do you think has happened to the price of imports from China since then? (Answer beneath the fold)

Since mid-2011, the import price of goods from China has fallen by 4%. That’s the price paid by US importers. Meanwhile, the price charged by US factories for finished consumer goods (less food and energy) has risen by 16% over the same period.

 

The continued lack of inflation in Chinese imports, despite the sharply rising wages for Chinese factory worker, is the single most important “unknown” economic statistic for policy today. It explains why US inflation has stayed so low, despite the low unemployment rate at home. At the same time, the growing gap between US factory prices and Chinese import prices explains why it has been so hard for US domestic factories to get traction. In other words, we have been losing competitiveness.

We also must remark that the decline in the Chinese import prices is just hard to understand. It doesn’t appear to be a composition effect–since 2012 the BLS has been tracking the import price of different products from China, and they all show the same behavior of no inflation. And it’s not a currency effect, because the yuan-dollar rate is at the same level. It could be an enormous increase in Chinese factory productivity over a very short time, of course, just at a time when US factory productivity growth has been slowing. Still, the gain in productivity would have to be improbably rapid to compensate fully for the higher wage rates.

At the moment when and if Chinese import prices do start to rise, that will be the sign that US inflation is about to pick up again. It will also tell us something very important about US competitiveness.

Added as of October 21, 2017:

According to official Chinese government figures, the producer price index for consumer goods in China rose  at a 0.7% yoy rate in September, which is consistent with the import prices to the US.