Why import prices are not falling anymore

There are three major reasons for import prices no longer falling but rising.

First of all, virtually every Western and Japanese company that can produce more cheaply in the emerging industrial countries has already relocated its production there. The downward pressure this exerted on inflation is therefore behind us.

Second, for many years already there has been a surplus of supply in the labor market and therefore low wage rises. This would have meant, in principle, that the increase in turnover would also have been low. This was unacceptable for the central banks, however, as it would have caused deflation. This had to be prevented at all costs, as the combination of high debt positions and deflation is fatal for an economy. As we said, the central banks in the West and Japan therefore pumped large quantities of money into the system. This put strong upward pressure on the currencies of the emerging industrial countries. They wanted to maintain their dollar pegs, though, which necessitated increasing intervention to keep the rate of their domestic currencies low. The downside to this intervention, however, was that the money supply in the emerging markets increased far too far, which initially led to a sharp rise in property prices there, in particular. In time, however, domestic demand therefore also rose. The extremely loose monetary policy also led to increasing borrowing in the emerging countries.

Meanwhile, the hope was that if this caused a rise in domestic demand in the emerging countries they would also start importing far more from the West and Japan. This only happened to a limited degree as these countries are in a development phase, where they primarily need goods and services they can produce most cheaply themselves. So these countries had no problem with cheap import competition. In time, though, a shortage of well-educated labor came about. This exerted upward pressure on wages. All this accelerated after the credit crisis. The emerging countries quickly realized that the credit crisis meant growth would remain low for some time in the West and Japan. This was highly disadvantageous for their economies, which were chiefly geared to export to the West and Japan. They therefore started aiming economic policy far more at stimulating domestic demand. As we said, this had already been happening for some time, due to the excessively loose monetary policy, but the authorities there attempted to boost domestic demand even further by stimulating higher wage rises. The result was that wage costs in many emerging countries – and especially the price setter, China – started rising rapidly. As a result, import prices in the West are no longer falling but rising. This development should be viewed from a slightly broader perspective.

The West and Japan have had the greatest difficulty in reducing unemployment following the credit crisis. The pressure to reduce cheap imports from the emerging countries has therefore increased drastically. In fact, the West and Japan are largely keen to create a situation where they can export more to the emerging countries. But then there have to be changes to the cost difference. Hence the tremendous pressure the West and Japan are exerting on the emerging markets to allow their currencies to appreciate or to ensure rising wages. Both would mean the West and Japan could export more and import less. The other side of the coin, however, is that the time of cheap import competition for the West and Japan is over. Import prices are no longer falling, but rising.

Finally, there is also another mechanism causing import prices in the West to rise rather than fall. In the emerging industrial countries, the commodity consumption per Gross National Product unit is much higher than in the West and Japan. Now that growth in the emerging countries is higher, the demand for commodities has risen sharply. This is pushing up commodity prices. Especially now the unrest in the Arabic countries and weather conditions are hitting the supply of commodities hard. This is added to by the disaster in Japan, which means the country needs extra commodities for reconstruction. The West and Japan have to import many of these commodities. All this is therefore driving up import prices.