U.S. reimports inflation

The establishment media is waking up to something the Mogambo Guru warned us about months ago:  The inflation that the United States has been exporting to China is now coming back home:

Soaring energy and raw material costs, a falling dollar and new
business rules here are forcing Chinese factories to increase the
prices of their exports, according to analysts and Western companies
doing business here.

The rise was a modest 2.4 percent over the
last year. But even that small amount, combined with higher energy and
food costs that also reflect China’s growing demands on global
resources, contributed to a rise in inflation in the United States.
Inflation in the United States was 4.1 percent in 2007, up from 2.5
percent in 2006. [Editor's note: That figure is bogus, but constant readers know that already.]

Because of new cost pressures here, American
consumers could see prices increase by as much as 10 percent this year
on specific products — including toys, clothing, footwear and other
consumer goods — just as the United States faces a possible recession.

Which raises the usual question: If America sneezes, will China catch cold?  The article more or less sidesteps the question, but it notes the following:

Some of the current cost pressures are actually by design — Beijing’s design.

years of complaints from the United States and Europe about China’s
growing trade surplus, authorities here have removed incentives that
once favored exporters of cheap goods.

Starting last June, for
instance, China removed or reduced tax rebates on hundreds of items for
export, including toys, apparel, leather, wood and other goods,
effectively taxing those industries.

But the actions are also
part of Beijing’s desire to move China higher up the global
manufacturing chain — away from the least- finished products, like
plastic children’s toys, toward more advanced exports that require
skilled labor, like small electronics and even automobiles.

Then again, it might be a sign of something we warned about here months ago:  That China is reaching that inflection point where economic growth no longer relies on exports, and the Chinese themselves can start consuming all those toys, clothes, and so on.  A steady rise in Chinese wages is goosing the process.

Time was I thought the yuan would retain its loose dollar peg for a number of years to come.  But the way things are going, there's at least an outside chance the yuan will be uncoupled completely not long after the Olympic flame is snuffed in Beijing. 

The Daily Reckoning