What have we learned about inflation over the past year? One of the main reasons that the US doesn't need to have a recession to bring down inflation is that China is having the recession for us. China's property bubble has burst, and the deflationary consequences are far greater and more global than those following the bursting of similar bubbles in Japan during the late 1980s and in the US during the Great Financial Crisis of 2008. Consider the following:
(1) The US PPI finished goods inflation rate is highly correlated with the China PPI and the US import price index for goods from China (chart). All three are deflating on a y/y basis.
(2) The US headline CPI goods inflation rate is highly correlated with China's CPI goods inflation (chart).
(3) We are monitoring the prices of copper and crude oil as well as various Chinese stock market indexes to assess the scope and magnitude of China's economic and financial morass. They all confirm that China's problems won't be solved easily or quickly. The biggest problem is the bursting of China's property bubble, as evidenced by the ongoing plunge in real estate stock prices (chart).
(4) The China MSCI stock price index has been basically flat since 2008, while the US MSCI is up more than fourfold since then (chart)! The US recovered much better from both the Great Financial Crisis and the Great Virus Crisis than did China.
(5) The China and India MSCI stock price indexes have diverged significantly since the pandemic (chart). The former is down 57% since its record high on February 17, 2021, while the latter is up 43% over the same period through today's close.
