When President Joe Biden meets with Chinese leader Xi Jinping, they won’t shake hands. It isn’t a diplomatic snub. The two will meet virtually instead of in person. But the question for investors is whether they will see eye to eye on inflation.
The two largest economies in the world are experiencing inflationary pains. Higher costs of goods in China, supply chain pinch points in both countries, and a lot of cash sloshing around the U.S. have conspired to help fuel inflation there and here. And sustained higher prices threaten both economies as they work to recover from the pandemic.
Its doubtful inflation is high on the agenda when the two leaders meet, which is expected to be in the week ahead. China-U.S. relations are strained over national security issues (Taiwan, selling nuclear subs to Australia), human rights issues (cracking down on civil liberties in Hong Kong) and the coronavirus.
Inflation should be a topic for the two leaders, though. It is a national security and foreign policy issue for both countries. Inflation may be a monetary phenomenon, but it can be destabilizing for an economy and devastating for households.
Chinese wholesale inflation is at a 26-year high. This means the prices factories in China are paying for materials have shot higher. Lots of that stuff coming out of those Chinese factories will be headed to the U.S. — and with higher prices. In October, American consumer prices saw their biggest year-over-year surge in more than 30 years.
The Federal Reserve has stated its higher tolerance for hotter-than-usual inflation in the effort to spread job gains into more corners of the economy. Increasingly, though, consumers and investors may get jittery about the central bank’s ability to contain higher prices before they become more permanently anchored in the economy.
But China has a different worry — overall economic growth. The COVID-19 bounce-back is slowing considerably, pressuring the central government to keep the economy propped up with cheap borrowing and tolerating escalating inflation. The Communist vice grip on China is held in place by an ever-expanding economy.
The U.S. monetary tools to battle inflation — higher interest rates — cannot be exported to fight higher prices on foreign soil. But those higher prices can be imported.
