China Exports Most Deflation To The US Since The Financial Crisis

Today's import price index report from the BLS showed a modest improvement at the headline level: declining by 0.40% this was half the expected decline of -0.80% and a modest pick up from last month's -0.50%. A big reason for this continues to be oil, which saw a -2.5% drop in November after a 0.1% increase the prior month, with import prices for non-fuel products down -0.2%, the highest since June.

Annually, the pace of declines also picked up modestly dropping "only" -9.4% from a year ago, higher than the -10.50% slide in October. Import prices have now seen an annual decline for 16 consecutive months starting in July 2014.

Some more details from the report:

Fuel Imports: Fuel prices resumed a downward trend in November, declining 2.5 percent following a 0.1-percent uptick the previous month. The price index for import fuel decreased 24.9 percent between June and September. A 2.5-percent drop in petroleum prices and a 4.6-percent decline in natural gas prices both contributed to the November decline in overall import fuel prices. Prices for overall fuel fell 43.2 percent over the past 12 months, after decreasing 15.9 percent between November 2013 and November 2014. Petroleum prices declined 44.5 percent over the past year, while prices for natural gas fell 32.3 percent. 


All Imports Excluding Fuel: The price index for nonfuel imports also decreased in November, falling 0.2 percent following 0.3-percent declines in each of the previous 4 months. Lower prices for nonfuel industrial supplies and materials; foods, feeds, and beverages; capital goods; and automotive vehicles all factored into the November decline in nonfuel import prices. Prices for nonfuel imports decreased 3.2 percent for the year ended in November. Prices for nonfuel industrial supplies and materials; foods, feeds, and beverages; and each of the major finished goods categories all fell over the past 12 months.         

And while the headline figure suggested there is some hope that import prices will improve at the headline level in the coming months, something else has emerged which suggests that the real importing of others' deflation is only just starting. Or rather, someone else.


Here are the details from the report:

Prices for imports from China declined 0.3 percent in November, matching  a 0.3-percent decrease in May. Those were the largest monthly drops since the index fell 0.6 percent in May  2013. Import prices from China decreased 1.5 percent over the past 12 months, the largest year-over-year drop since the index declined 1.7 percent for the year ended in January 2010.

This means that China just exported the most deflation to the US since the financial crisis!

So if China's intention was to join Japan and Europe in exporting its deflation to the US, despite the CNY peg to the USD, it has succeeded as shown below.


What is going on here? Simple: with all of its domestic markets fully saturated, China has had no choice but to export its soaring commodity production as we explained in "Behold The Deflationary Wave: How China Is Flooding The World With Its Unwanted Commodities." This is how Bloomberg qualified the problem:

Shipments of steel, oil products and aluminum are reaching for new highs, according to trade data from the General Administration of Customs.


That’s because mills, smelters and refiners are producing more than they need amid slowing domestic demand, and shipping the excess overseas.


The flood is compounding a worldwide surplus of commodities that’s driven returns from raw materials to the lowest since 1999, threatening producers from India to Pennsylvania and aggravating trade disputes. While companies such as India’s JSW Steel Ltd. decry cheap exports as unfair, China says the overcapacity is a global problem.


The flood of Chinese supplies is roiling manufacturers around the world and exacerbating trade frictions. The steel market is being overwhelmed with metal from China’s government-owned and state-supported producers, a collection of industry associations have said. The nine groups, including Eurofer and the American Iron and Steel Institute, said there is almost 700 million tons of excess capacity around the world, with the Asian nation contributing as much as 425 million tons.


Low-cost supply from China in Europe prompted producer ArcelorMittal to reduce its profit forecast and suspend its dividend. India’s government has signaled it’s planning more curbs on steel imports while regulators in the U.S. are planning to lift levies on shipments from some Chinese companies.

And judging by the relentless surge in exports of Chinese commodities, China's deflationary wave not only to the US, but the entire world, is only just starting.

So unless the Fed is ready to devalue its own currency, get ready for wholesale inflation to tumble as the US is on deck to import near record amounts of Chinese deflation in the coming months and years, especially if China continues to devalue its currency, either stealthily or not so stealthily as it did in August and as many expect it will do again in the coming months.