End of the free ride for US consumers

Asian inflation and a weaker greenback are driving up US consumer prices

The free ride for American consumers is ending. For two generations, Americans have imported cheap goods from low-wage countries – first Japan and Korea, then China and now places like Vietnam and India.

But inflation in the developing world, especially Asia, is threatening this. And it is not just limited to China – where rising energy and labour costs have made exports to the United States more expensive – but also in countries with lower production costs.

“Inflation is the major threat to Asian countries,” said Mr Jong Wha Lee, head of the Asian Development Bank’s office of regional economic integration.

It is also a threat to Western consumers because Asian exporters, even in very poor countries, are passing on their rising costs.

Developing countries have experienced bouts of inflation. Some are famous for them, like Brazil, which experienced triple-digit inflation in the late ’80s and early ’90s. But two factors make this time different and promise to push prices higher in the US, just as the possibility of recession looms.

First, developing countries now produce nearly half of American imports. Second, inflation in these countries comes when many of their currencies are rising against the US dollar.

This puts US consumers in a double bind, paying at least some of producers’ higher costs for making their goods and higher prices on top of that because the dollar buys less in those countries.

Asian businessmen say they do not have a choice. “This is a tough time to do business,” said Mr Le Hoai Vu, sales manager for Quang Vinh Ceramic in north Vietnam.

The company has increased by up to 10 per cent prices for hand-painted vases because labour costs are rising 30 per cent a year.

Overall prices in Vietnam rose 19.4 per cent between March 2007 and March 2008.

In China, Foshan Shunde Augustus Bathroom Equipment is about to raise prices by 10 per cent for bathroom fixtures exported to North America.

“Rising inflation is a way of life in China these days, you see it everywhere,” said its international business supervisor Faye Kong.

The cost of American imports from less-industrialised countries as a group is rising. A Bureau of Labour Statistics index of average prices for imports of manufactured goods from such countries fell gradually through early 2004. But it is now rising briskly and was up 5.6 per cent in February from the same month last year.

This contributes to rising inflation in the US. In the 12 months through February 2008, the prices of goods in the US increased 4 per cent, according to the government’s consumer price index.

But so far, Asian exporters have passed along only a portion of their costs. The US dollar’s weakness is a cause of inflation in developing countries, especially those that barely let their currencies rise against the greenback to hold on to export markets.

Ms Teresa Gau, a fishmonger in Taipei, is charging up to a third more for fish and crabs than she did a year ago, as fishing boat owners charge more to cover higher diesel costs.

In Vietnam, Quang Vinh Ceramic’s fastest-rising expense is for blue ink for painting pottery. Imported from Belgium, the ink is priced in euros and has soared 80 per cent over the last year in Vietnamese dong.

Keeping the dong inexpensive in US- dollar terms has not only helped Vietnam increase exports by 24.1 per cent last year, but also lured a flood of investment. Bank loans rose more than 50 per cent last year, feeding a real estate frenzy that has not yet abated.

Brick kiln owners like Mr Le Thi Hop in Vietnam have responded by tripling prices in the last year. “Most people who buy my bricks say the price is crazy, but I say, ‘This is the market’.”- New York Times 

Keith Bradsher

Source : Today – 9 Apr 2008

Join The Discussion

Compare listings