Thursday, February 21, 2008

China is the mother of global inflation! - ? - No! (fg)

I just came across an article of Paul Kugman who discussed in his blog whether recent claims that increasing (labor) costs in China are the very origin of overall global inflation dynamics are justified or not. Krugman refers to an article by IMF and OECD staff that states that China's total exports (and thus imports for the rest of the world) are too small to trigger inflation abroad. They write that
With China's share in global trade increasing rapidly, some argued in 2002-2003 that China was exporting deflation to other countries as it was dumping cheap goods in mature markets. Later, others argued that China was causing sharp increases in global prices. This paper uses several econometric techniques to assess the extent of the link between inflation rates between China and the USA and Japan. Only limited empirical evidence at the aggregate level is found for consumer price inflation in China leading to price changes in the USA and Japan. However, there is some evidence that inflation in the USA has an impact on Chinese inflation. The results seem consistent with the Federal Reserve and the Bank of Japan being concerned about inflation and, hence, adjusting policy such that inflation shocks have no significant effect on overall inflation. Recent Chinese price rises are unlikely to have a material effect on the USA or Japan.
Well, it may be true that with the help of econometric techniques one might come to this conclusion. However, as you might all know, these studies always assume the famous cost push fallacy according to which relative price changes are misleadingly understood as absolute price changes. Therefore, one cannot blame China to be the exporter of deflation or inflation. It's the credit, stupid!