'Made in China' label may no longer mean cheap

THE rising cost of goods the US imports from China may be an early warning signal that central bankers from Britain to India are about to pay a price for a cause they have championed: globalisation.

China, a source of cheap manufactured products for the past two decades, may be starting to export inflation as the world economy grows at the fastest pace in a generation.

Prices of US imports from China increased 0.3 per cent in May from the previous month — "the first sign I have seen that this disinflationary pressure" from China's cheap goods may be fading, former Federal Reserve chairman Alan Greenspan said last month. Prices rose 0.3 per cent again in June, the biggest back-to-back increase since record-keeping began in December 2003.

With monetary policymakers struggling to contain pressures from other forces beyond their control — increased trade, faster capital flows and record commodity prices — officials including Bank of England governor Mervyn King and New Zealand's central bank governor Alan Bollard may have to raise interest rates or maintain them at higher levels for longer than they might prefer.

"Domestic monetary policies may nowadays be less potent in controlling domestic inflation than in the past, a disturbing thought for central bankers," says Joachim Fels, chief global fixed-income economist at Morgan Stanley in London.

The increasing integration of the world's economies isn't fully understood, even by those who have benefited the most from expanding international trade and investment. Fed Chairman Ben Bernanke has said it may complicate policymaking, and the benefits of cheaper imported goods are, at least, countered by higher costs for raw materials.

Booming global demand is already forcing up food and commodity prices and squeezing spare productive capacity at a time when more investment from abroad weakens central banks' grip on the supply of money in their economies. The International Monetary Fund predicts that the amount of slack will shrink to 0.1 per cent of global gross domestic product in 2008 from 0.4 per cent last year.

Officials and economists will debate the shifting dynamics of globalisation and its impact on monetary policy during the next two days at the European Central Bank in Frankfurt. Speakers at an invitation-only forum include ECB President Jean-Claude Trichet and Fed governor Frederic Mishkin.

The conference comes as China, the world's fourth-largest economy, reports the quickest pace of growth in a dozen years, pushing inflation to 4.4 per cent in June. On July 21, China raised its benchmark rate to an eight-year high of 6.84 per cent.

In the past, central bankers have harnessed the effects of low-cost production from China and other countries such as India to hold down interest rates and stimulate domestic growth.