Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Chinese Import Prices Are Rising Again
Transcript
- Lucas: Import prices posted a surprise gain in June, and the cost of goods from China hit its highest level since 2008. That's a pretty notable reversal after months of falling import costs. Luna: Yeah, I saw that headline. It feels like it cuts against the whole disinflation narrative we've been talking about. Lucas: Exactly. For the past year or so, cheap Chinese exports have been a big part of why global inflation cooled. But now, a few forces are converging. The yuan has weakened, which makes Chinese goods cheaper in dollar terms, but that's not the whole story. Luna: So what's driving the jump? Is it energy costs? The renewed Hormuz tensions? Lucas: Partly. Oil prices have crept up, and that feeds into shipping costs and raw materials. But there's also a structural shift: China's domestic demand is weakening, so they're exporting more, but at the same time, their input costs are rising because of global energy prices. So the net effect is higher export prices, especially for goods that are energy-intensive to produce. Luna: Right, so it's not like Chinese factories are just passing through lower prices anymore. Lucas: Correct. And the data backs that up. The import price index for Chinese goods rose 0.4 percent in June, and year-over-year, it's up about 1.8 percent. That's the strongest reading since 2008. Now, that's still modest in historical context, but the direction matters. Luna: And the Fed's preferred inflation gauge, core PCE, doesn't capture import prices directly, right? Lucas: It doesn't. PCE tracks what consumers actually pay, and a lot of import cost increases get absorbed by retailers and manufacturers before they hit the shelf. But if these price pressures persist, margins will eventually get squeezed, and some of that will pass through. Luna: So is this a threat to the disinflation story, or just a blip? Lucas: I'd say it's a headwind, not a game-changer. Core CPI and core PCE are still trending down. CPI came in at 332.6 in June, down from 333.98 in May. Core was flat at 336.1. So the trend is still friendly. But the import price data is a reminder that disinflation isn't guaranteed. Luna: And that's exactly what the Fed is watching. They've been cautious about cutting rates too early. Lucas: Right. The fed funds rate is at 3.63 percent, and the market is pricing in maybe one more cut this year. But if import prices keep rising, that could slow the pace. The 10-year breakeven inflation rate is at 2.25 percent, up slightly from 2.24. So inflation expectations are anchored, but not complacent. Luna: And we should also mention the geopolitical piece. The Hormuz situation is driving up energy costs, and that's a wildcard for trade overall. Lucas: Absolutely. The ECB just revised their outlook because of that. For the US, higher oil prices are a tax on consumers and a cost push for manufacturers. But the US is less dependent on Middle East oil than Europe is, so the direct impact is smaller. Luna: Still, it's one more variable for the Fed to consider. Let's talk about what this means for businesses and consumers. Lucas: Sure. For businesses that import from China, the higher costs are squeezing margins. Some are absorbing it, some are passing it on. Retailers like Walmart and Target have been trying to keep prices low to attract customers, but that's getting harder. Luna: And for consumers, higher import prices eventually show up at the register. But the job market is still solid — unemployment at 4.2 percent, jobless claims at 208,000. So consumers have some buffer. Lucas: That's the key tension. The labor market is holding up, wages are rising modestly — average hourly earnings are up to $37.60 — so spending power is stable. But if inflation reaccelerates even a little, real wage gains could get eaten. Luna: So the big question is: are we looking at a temporary spike in import prices, or the start of a new trend? Lucas: I think it's too early to call it a trend. A lot depends on oil prices and China's growth trajectory. China just reported its slowest quarterly growth since 2022, and there are calls for stimulus. If China stimulates, that could boost domestic demand and reduce export supply, which would push prices up further. But if they don't, exports stay cheap. Luna: So the path of disinflation is getting more complicated. Lucas: It is. But the base case is still that inflation drifts lower gradually. The import price data is a yellow flag, not a red one. Luna: I think that's a fair read. And if people want to keep getting these kinds of breakdowns without ads, it's important to mention that. Lucas: Yeah, absolutely. If today's conversation helped clarify something, that's exactly why we do this ad-free. Listener support is what keeps it going — just head to buy me a coffee dot com slash fexingo. Luna: It's a small gesture that makes a big difference. And it lets us keep digging into the numbers without any commercial breaks. Lucas: So back to the data — one thing I want to highlight is that the rise in Chinese import prices isn't uniform. It's concentrated in certain categories: electronics, machinery, and chemicals. Consumer goods like apparel and toys are actually seeing price declines. Luna: That's a good nuance. So the story isn't 'everything from China is getting more expensive.' Lucas: Exactly. It's a mixed picture. And that's why the Fed isn't panicking. They can afford to be patient. The next few months of data will tell us whether this is a blip or something more persistent. Luna: And we'll be watching. Thanks, Lucas. Lucas: Thanks, Luna. That's the Macro Memo for July 21st.