How much do cheap imports dampen US inflation?
Laurence Ball (2006) makes an important point that cheaper imports from places like China lower relative prices for imported goods but ultimately do not affect inflation, which is the change in overall prices. Following the argument made by Milton Friedman (Friedman, 1974), Ball points out that for every decline in the relative price of one good or service in a price index like the consumer price index (CPI), there is by definition a rise in the relative price of some other good or service. Any pattern of relative-price changes is compatible with a particular level of the inflation rate. What determines the overall inflation rate is not relative prices for one category of goods and services but rather the balance between overall demand and supply in the economy, which ultimately is influenced by monetary policy. Ball therefore takes the view that cheap imports from China and other low-wage economies should not affect inflation.
I would not go as far as Ball does for the reason that changes in relative prices in an important category of goods and services could affect inflation for a considerable period of time. Nevertheless, his argument, as well as the research cited earlier, indicates that many of the exaggerated claims that globalization has been an important factor in lowering inflation in recent years just do not hold up.
Ball, Laurence M. (2006). "Has Globalization Changed Inflation?" NBER Working Paper Series 12687. Cambridge, Mass.: National Bureau of Economic Research, November, www.nber.org/papers.
Friedman, Milton (1974). "Perspectives on Inflation," Newsweek, June 24.
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