Talk about top billing.
According to originator Mark Perry (who is probably a bit biased when it comes to describing the relative importance of his own work), the following visual is the “chart of the century”:
If that’s the most important chart in the world, then there’s hope for the non-economists among you yet, because there is exactly nothing complicated about it.
Basically, it just shows that inflation for things not subject to foreign competition has soared, while prices for consumer goods that are integrated into global supply chains have plunged. Here’s the above-mentioned Mark Perry:
The chart above (thanks to Olivier Ballou) is an update of a chart we produced last year about this time, and shows the percent changes since January 1997 in the prices of selected consumer goods and services, along with the increase in average hourly earnings in this version (which have increased by 81.5% over the last 21 years vs. the 55.6% increase in the CPI).
See any patterns? Tradeables (with import competition like TVs) vs. non-tradeables (like childcare), manufactured goods (with import competition like clothing and cars) vs. services (medical, hospitals, education), competitive (software) vs. protected industries (healthcare), degree of government involvement/funding/regulation?
The implications for the Fed are clear. If Donald Trump succeeds in upending the global trade order, he could end up reversing the dynamics that have driven down the cost of tradeable goods for decades.
According to Bloomberg, this chart has been “making the rounds at the Fed“. Here’s what the IIF’s Timothy Adams (who Bloomberg says has discussed the chart with policymakers) had to say:
We would have fewer choices, potentially less quality, less productivity and higher prices if we reverse globalization.
Again, there is nothing complicated about this. To the extent globalization has been a structural deflationary force, reversing globalization will have the opposite effect. That means the everyday Americans in flyover country that Donald Trump purports to be helping with his combative trade stance will have to pay higher costs for the consumer goods they purchase.
Additionally, it’s worth noting that the potential for the deglobalization push to drive up prices goes well beyond the one-off cost of tariffs being passed on to consumers. As Bloomberg goes on to note, in the same piece linked above, the effect of “countries and companies retreat[ing] from the international marketplace would be on top of the one-time effect that Trump’s tariffs will have on prices of selected imports.”
The result: the Fed could potentially be forced to tighten policy more aggressively to combat domestic inflation, something discussed here at length in “The Real Estate Developer, The Chinese Strongman And Cheshire Cat’s Smile“.
“Economic theory suggests that globalization is likely to have had a negative effect on inflation both in terms of its level as well as its volatility,” Barclays wrote, in a note dated June 7. They cited four factors to support that contention, one of which is the idea that “trade can increase price and wage flexibility domestically, leading to a flattening in the Phillips curve.”
The implication: a reversal of globalization leads to a steeper Phillips curve. Here’s the most important quote from the bank’s take:
A reversal of trade integration/openness trends implies a steeper Phillips curve, increased sensitivity to domestic economic conditions, higher inflation outcomes in the long term (all else equal) and higher inflation volatility.
The risk is that policymakers, accustomed to the ongoing deflationary shock engendered by globalization, fail to respond adequately to the abrupt reversal of the dynamic or that they lack the proper tools to fight inflation without denting economic activity, especially if the same thing that’s driving inflation higher (a trade war) is putting downward pressure on growth.
But don’t worry, you can be sure Donald Trump understands all of this.