When assessing the course of US inflation, it’s helpful to have a model; the one I use is the AD-AS model described in this post. The cost of imported inputs can be interpreted as a cost-push shock (rather than an overheated economy caused by high aggregate demand relative to low potential GDP). In this context, China — as a major supplier of inputs and commodities to the US — looms large. And hence, developments there loom large. The preliminary findings that the Chinese vaccines are not particularly effective against the omicron variant, combined with the Chinese authorities’ zero tolerance for covid infections, means that the disruptions to imports from China are likely to continue for some time.
From the Mozur and Liu in the NYTimes:
A new study looking at blood samples from people who received two doses of a Covid-19 vaccine made by the Chinese pharmaceutical company Sinovac suggested that the vaccine would be unable to prevent an infection of the new, highly infectious Omicron variant.
The research, which analyzed the blood of 25 people vaccinated with Sinovac, is the latest sign of the new challenge Omicron presents as it spreads across the world. The scientists from the University of Hong Kong found that, in laboratory experiments, none of the 25 samples produced sufficient antibodies to block the variant from invading cells. The researchers said it was not yet clear whether a third shot of Sinovac would improve the results.
The studies are preliminary, and antibody levels do not give a complete picture of a person’s immune response. It is unclear whether the Sinovac vaccine can fend off severe disease or death from Omicron, but it most likely offers some protection.
The policy of zero tolerance has clearly paid off in (at least reported) deaths, and cases.
Source: FT, accessed 12/30/2021.
The Chinese have achieved this outcome by use of extensive lockdowns in response to the fewest detected cases. Those lockdowns might be appropriate — especially if the Chinese vaccines are not very effective against omicron in terms of reducing hospitalizations or deaths — but they will certainly reduce output. And that means fewer exports to the US and/or more expensive exports. That in turn will exacerbate upward price pressures.
Figure 1: Cost push shock.
So far, import prices from China have risen about 4.7% since 2020M02 (in log terms, through November). The price of exported goods from China to the US likely fell, given the dollar has depreciated about 9.1% against the CNY over that period.
Figure 2: Price of imported goods from China, in $ (black), and USD/CNY exchange rate, in $/Yuan, both in logs 2020M02=0. NBER defined recession dates peak to trough shaded gray. Source: BLS, and Federal Reserve Board via FRED, NBER, and author’s calculations.
The price index doesn’t capture the disruption due to goods that didn’t get imported. We can only get some impression of this from the aggregate imports from China.
Figure 3: Imports of goods from China, not seasonally adjusted (black), adjusted using multiplicative Census X-12 over full sample (brown), and 12 month centered moving average (green), all in millions of $/month, on log scale. NBER defined recession dates peak to trough shaded gray. Source: BEA/Census via FRED, NBER, and author’s calculations.
How big of an effect will disruptions in China have on the US? Vox doesn’t hazard a guess. A variety of higher frequency (i.e., monthly) indicators only go through November (see Yardeni’s compilation), and would therefore not reflect the most recent set of shutdowns. But at a minimum, the international dimension needs to be kept in mind, when thinking about the course of inflation in 2022.
From Goldman Sachs, Effective Lockdown Index: January 3 Update: