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The prevailing narrative has been that the forces of globalization, with China at its helm, have pushed prices across the world lower thanks to the flood of cheap imports from the world’s second-largest economy.
Global disinflation from China, however, is set to ease after the nation’s inflation rate rebounded in February, says Isaac Meng, an emerging-markets portfolio manager for Pimco, in a note dated March 19. That could add to the buildup of inflationary pressures in the U.S. and elsewhere when fears over its resurgence are mounting on Wall Street.
The consumer-price index for China rose 2.9% year-over-year last month, its biggest jump since 2013, while its core gauge, excluding for food and energy prices, ran at an annual 2.5% pace, the fastest since 2011.
See: China’s consumer inflation hits 4-year high
“Chinese reflation is likely to be sustained by the tight labor market and rising core consumer prices, while supply discipline and a stable currency should mitigate disinflationary effects from China on commodity prices and exchange rates,” said Meng.
The country’s insatiable appetite for raw materials has kept its factories churning and fed its construction boom, buoying metal and energy prices. The CRB commodities index CRB, -0.39% a widely traded group of 19 commodities, has risen to 196 on Wednesday from 160 seen in early 2016, when oil prices WTCLK8, -1.17% fell below $30 a barrel.
The link between global growth and inflation and Chinese demand was strengthened in investors’ minds after Beijing’s policy makers attempted to pump the brakes on its rapid but debt-fueled growth in 2015, hurting prices for raw materials and throwing commodity-exporting emerging economies into turmoil.
With the U.S. already wrestling with price pressures from expansionary fiscal stimulus and a tightening labor market, investors may now have to contend with China’s ability to export global inflation trends across the world. As inflation moves closer to the Federal Reserve’s target of 2%, the central bank could upshift the number of rate increases it was expected to implement from three to a more aggressive four.
Such fears were responsible for injecting volatility into U.S. markets recently. It was only in February, when an above-average wage reading in the jobs report sent markets into a tailspin, pushing Treasury TMUBMUSD10Y, -1.46% higher and slamming benchmark stock indexes like the S&P 500 SPX, -1.15% which have since struggled to make up for all of the lost ground.
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In the note, Meng highlighted a few forces that have powered the stronger inflation numbers in China. Wages have risen amid falling slack in the economy. It’s urban unemployment rate fell to an all-time low of 4.98% at the end of last year, according to infrequently updated survey-based measures.
While, efforts to ease industrial overcapacity, especially in steel and coal, should “support upstream prices,” said Meng. Pimco estimated that the country has already cut 15% of its total capacity for steel production and 10% of its capacity for coal production.
Finally, the yuan USDCNY, +0.1597% has stabilized after steadily falling in 2015 to 2016, increasing the cost of buying Chinese imports.
Meng doesn’t mention the impact that protectionist policies emanating out of the U.S. would have on China. On Thursday, President Donald Trump announced tariffs on Chinese imports, stoking fears of a trade war with the world’s second largest economy.
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