Stuffed animals, cell phone cases, tote bags, pet toys and key chains – manufacturers in China and Vietnam churn out custom goods at low cost for One World Sourcing, an Ohio-based company that has seen brisk business since it was formed in 2002.
“If you’re shopping, you’re buying things that are not made in the U.S., I guarentee it,” said Scott Simmerson, a partner at One World. “The price of manufacturing is everything.”
For decades, American companies have taken advantage of cheap labor in developing countries and American consumers have reaped the benefits of inexpensive consumer goods, but those same low prices are now thwarting efforts to manage the domestic inflation rate.
Despite trillions in monetary stimulus and more than four years of near-zero interest rates, the Federal Reserve has failed to drive up inflation to its 2 percent target over the last year, raising concerns about deflation and the strength of the recovering economy. Although the Fed’s money infusions should drive up prices, struggling economies across Asia and the Eurozone have bolstered the dollar and held down American inflation, said Mikhail Melnik, an economist at Southern Polytechnic State in Georgia.
“Their weaknesses help control inflation here,” said Melnik. “Once foreign economies start recovering, especially those that sell their products to us, we might see some inflationary pressure starting to materialize, and it could seriously hurt us.”
The costs of services like medical costs and housing have increased by 2 percent year-over-year since September 2011, but goods like electronics and apparel have moved into modest deflation in the last year, reaching a 5-year low of -.4 percent year-over-year in February. Federal Reserve Chair Janet Yellen blamed imports for low inflation in February, but called the effect “transitory.”
Economies in the US, Europe and Japan are expect to improve this year, said Richard Cooper, an international economist at Harvard University. Cooper also expects stable growth in China, despite predictions that the country could face a downturn in 2014. As those economies pick up, the excess capacity and low demand holding down prices will dissipate and imported goods will inch back up, but those changes may not directly move the Consumer Price Index, he said.
“Imported goods create a competitive environment that keeps markups down and serves as an anti-inflationary pressure,” Cooper said. “But the US market is so large that most foreigners price to the US market.”
Hugh Johnson, chairman of Hugh Johnson Advisors, said that although poor economic performance in Europe and China could “bring the whole house of cards down” and lead to deflation, high inflation is the more likely situation in the future. In the long term, he expects inflation to overshoot the Fed’s 2 percent target, but stop before reaching 4 percent.
“There’s no reason to believe that those price increases are going to stop at 2 percent as the Federal Reserve would like,” he said. “[But] we’re not getting the kind of monetary growth rates that led to extremely high rates of inflation in the 1980s.”
Simmerson expects the price of imported goods to rise in the near future as the economy improves, but he also predicts more long-term changes. He’s visited China numerous times over more than a decade of business deals, and he said he’s seen social changes that will change how the country trades with the rest of the world.
“Labor there is getting more expensive,” he said. “Down the road, China’s not going to be supplying the US any more. They’re going to be making things for their own middle class.”