The most important inflation chart to focus on right now is that of producer prices in China. It provides a depiction of what is happening with prices at the early stages of production in the largest net exporter nation.
China’s producer prices tend to filter into the rest of the world in the form of exported deflationary or inflationary pressures. After remaining deep in negative territory since early 2012 and registering a long string of consecutive contractions, China PPI has turned positive and is moving sharply higher.
It may only be a temporary spike to 7% that plateaus and then falls off as it did in 2011. According to the models I follow, which directly oppose the more traditional models used by many Keynesian economists, consumer price inflation is an input directly responsible for choking off economic gains. You can’t easily make raw commodities cost less but you can often replace labor with automation at a certain breakeven cost point. Thus, wage gains will struggle to keep up with input-cost led inflation, inflicting harmful economic damage when central banks get behind the curve rather than providing additional stimulus from “running the economy hot.”
In that sense, higher inflation may take care of itself by slowing down growth and threatening to let air out of the massive China credit bubble. Of course, monetary conditions should be tight enough to prevent the type of extreme credit expansion seen in China and elsewhere from happening in the first place. However, we are living in a Keynesian-dominated world of permanent bubble manufacturing after all. But what if the credit bubble doesn’t burst and producer prices keep rising?
If China PPI doesn’t level off very soon and it indeed surpasses 2011 levels, we have ourselves a potential black swan for 2017. Global consumer prices would certainly follow the China PPI trend with or without additional oil price gains (higher oil will only compound the problem). It is too early to know at this stage, but you should be watching the most important inflation chart in the world for further clues as new data is released out of China. We may eventually be headed for an inflationary spike followed by the bursting of the great credit bubble, in which China is at the epicenter.