A New York Federal Reserve research paper considers the impact of a scenario in which a credit-fueled boom in manufacturing activity produces higher-than-expected economic growth in China.
- "A key finding is that such a boom would put meaningful upward pressure on U.S. inflation."
In brief:
- Government-supported manufacturing growth in China could make U.S. inflation persistently high
- Beijing's policies designed to spur manufacturing activity can help lift the Chinese economy out of weak household demand, high indebtedness and demographic and political headwinds to growth
- But, while the resulting increased production could reduce global prices of Chinese exports, increased Chinese production "would place (upward pressure) on global commodity markets and the broader manufacturing supply chain
- The chain of events would lead to higher PCE inflation in the U.S.
Link to the full piece is here.
ps. the next PCE inflation report is due from the US on Friday. And you'll never guess who's weighing in with comments afterwards ... (Spoiler, Federal Reserve Chair Powell)
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The Federal Reserve prefers the Core Personal Consumption Expenditures (PCE) Price Index over the Consumer Price Index (CPI) as a measure of inflation for several key reasons:
- The Core PCE covers a broader range of goods and services than the CPI. While CPI focuses on out-of-pocket expenses for urban consumers, PCE includes expenditures on behalf of households, such as employer-paid health insurance and Medicare. This wider scope makes PCE a more comprehensive measure of consumer spending.
- PCE adjusts for the substitution effect, where consumers might switch from higher-priced goods to lower-priced alternatives as prices change. CPI, on the other hand, uses a fixed basket of goods and services, which can overstate inflation if consumers shift their consumption patterns in response to price changes.
- PCE specifically measures spending by individuals and can more accurately reflect the consumption patterns that are central to the U.S. economy.
- The 'core' version of both indices (Core PCE and Core CPI) excludes food and energy prices, which are volatile. However, the Fed often gives more weight to Core PCE because of its broader coverage and substitution bias adjustment.
- PCE data are subject to regular and comprehensive revisions that reflect the latest and most accurate information available. This can make PCE a more reliable measure over the long term.
- Core PCE is a more stable and accurate reflection of the long-term inflation trends that guide monetary policy.
