EDIT
Food and energy prices may not count in the Fed’s inflation metrics, but they sure count in the lives of everyday Americans these
days. While core inflation may be barely over 2%, that’s only of solace if you don’t eat or drive. Headline inflation is running at almost double that and it isn’t about to be coming down any time soon (see pages 8-11). Not
when world oil prices are heading toward $200 per barrel, with grain price movements not far behind.
Food inflation isn’t about the US economy any more than triple-digit oil prices are about motorists driving on interstate freeways.
They’re instead about hamburgers replacing rice bowls and millions of new Tata and Chery drivers on traffic-choked roads in China, India and the rest of the emerging market world.
But even more threatening to the outlook for price stability than the rise in oil prices, is the fact that exploding transport costs are removing the single most important brake on inflation over the last decade—wage arbitrage with China. Not that Chinese manufacturing wages won’t still warrant arbitrage. In and of themselves, they will. But in today’s world of triple-digit oil prices,
distance costs money.
The cost of shipping a standard 40-foot container from East Asia to the US eastern seaboard has already tripled since 2000 and will double again as oil prices head towards $200 per barrel (see pages 4-7). Unless that container is chock full of diamonds, shipping costs have suddenly inflated the cost of whatever is inside. And those inflated costs get passed onto the Consumer Price Index when you buy that good at your local retailer. As oil prices keep rising, pretty soon those transport costs start cancelling out the East Asian wage advantage. They already have in steel. Soaring transport costs, first on importing iron to China and then exporting finished steel overseas, have already more than eroded the wage advantage and suddenly rendered Chinese-made steel uncompetitive in the US market.
That’s great news if you are the United Steelworkers of America. Long lost jobs will soon be coming home. And the more that oil prices and transport costs rise for Chinese steel exporters, the more that US steel wages can grow. But if you’re a steel buyer, your
costs are going up regardless of whether you are sourcing it from China or Pittsburgh.
EDIT
http://research.cibcwm.com/economic_public/download/smay08.pdf