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Sun, Aug 27, 2006 - Page 12 News List

Western countries wary of inflation as China prices rise

The cost of Chinese goods has climbed each of the past four months, and the increases will be passed on to consumers at some point

NY TIMES SERVICE , HONG KONG

Anthony Temple, Paddington bear rights owner, says China is no longer a ``bottomless pit of cheap products.''

PHOTO: NY TIMES NEWS SERVICE

During 20 years in the toy business, Anthony Temple has reveled in the bounty of cheap stuffed animals, coffe mugs and figurines on sale from China. But, this year, his buying trip for his London-based company, Rainbow Designs, resulted in a rude awakening.

Traveling through the Pearl River delta north of Hong Kong, Temple found that cost increases -- for raw materials, but above all for labor -- dominated every discussion he had with suppliers.

Far from being keen to underbid each other, Chinese companies talked so consistently about marking up their prices 5 percent to 10 percent that Temple, whose company owns the British distribution rights to cuddly creatures like Paddington Bear and Jemima Puddle-Duck, became convinced that these were not simply negotiating tactics.

"When I went over there, I was under the belief that China is a bottomless pit of cheap products," Temple said.

"When I left, I was not," he said.

As the Chinese economy races forward, signs are multiplying that the Asian giant is beginning to slow its exports of something dear to the hearts of many consumers in developed countries: ever cheaper products.

For at least a decade, China has provided a boost for inflation-fighting central banks in Europe and the US by consistently cutting prices on a wide variety of goods, helping counterbalance the upward drift of overall consumer price levels.

US Federal Reserve Chairman Ben Bernanke opened an annual conference of central bankers in Jackson Hole, Wyoming, on Friday with a speech that noted how the emergence of China as an export powerhouse has altered the world economy in less than 30 years.

China's role in global disinflation -- as the phenomenon is known to economists and central bankers -- is not going to disappear. But a few recent numbers, along with anecdotal evidence, suggest that China's contribution to low prices around the world may be ebbing.

The European Central Bank promised to step up research into what has been called the "China effect."

Top officials at the US Federal Reserve have also begun speaking out about it. And the debate over how much China has contributed to taming global inflation is a central topic at the annual Jackson Hole gathering of the world's leading central bankers and academic economists.

In the US, data shows that Chinese import prices, which have fallen since data collection began in 2003, are leveling off, as are prices from other low-cost emerging markets.

The price of Chinese goods has leapt upward in the last four months, according to a purchasing managers' survey performed by London-based NTC Research. The survey's index showed a level below 50 -- a level indicating stable prices -- in March but it now stands at 56, a steep increase by the standards of a survey that usually moves in fractional increments.

China's galloping economy has been sending ripples through the global economy for years as demand has raised prices for critical commodities such as oil and copper there. China's purchases of US Treasury securities have also helped keep interest rates low.

And not all economists buy the overall notion that Chinese prices will soon pump up inflation rates in the industrialized world and force central bankers to press harder on the brakes. Skeptics about the "China effect" tend to focus on the ability of China and its customers to adapt.

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