China’s latest export to the US: Inflation.

Published: February 1, 2008

inflation graph

SHANGHAI — China’s latest export is inflation. After falling for years, prices of Chinese goods sold in the United States have risen for the last eight months.

Soaring energy and raw material costs, a falling dollar and new business rules here are forcing Chinese factories to increase the prices of their exports, according to analysts and Western companies doing business here.

The rise was a modest 2.4 percent over the last year. But even that small amount, combined with higher energy and food costs that also reflect China’s growing demands on global resources, contributed to a rise in inflation in the United States. Inflation in the United States was 4.1 percent in 2007, up from 2.5 percent in 2006.

Because of new cost pressures here, American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear and other consumer goods — just as the United States faces a possible recession.

In the longer term, higher costs in China could spell the end of an era of ultra-cheap goods, as well as the beginning of China’s rise from the lowest rungs of global manufacturing.

Economists have been warning for months that this country’s decade-long role of keeping a lid on global inflation was on the wane.

“China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices,” said Dong Tao, an economist for Credit Suisse. “But its heyday is over. We’re going to see higher prices.”

“…In the meantime, makers of toys, apparel and footwear — highly labor-intensive industries — are being forced to consider raising prices even as growth in the United States slows, a rare confluence of events not seen in decades.

Companies that began outsourcing production to China in the 1990s mostly benefited from lower costs, which translated into both higher corporate profits and lower consumer prices. Now, many Western companies have to rethink pricing.

“Companies are now ordering for the spring of 2009,” says Nate Herman, director of international trade at the American Apparel and Footwear Association, based in Arlington, Va., that represents some big clothing and footwear makers. “Factories are coming back and asking for 20, 30, 40, 50 percent price increases.”

Will importers pass those costs on to consumers? “It’s going to be hard to avoid some increase,” he said.”

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