The U.S. has come out of an era in which it was importing disinflation from overseas, bringing in products that undercut prices of the same goods produced domestically. Along with inexpensive imports, businesses were able to send work abroad to be done by low-cost labor. As a result, for decades the U.S. economy lived in a world of lower prices and controlled wages – a unique period in history. When that all started slowing in mid-2021, inflation surfaced, triggering the Fed to increase interest rates eleven times. Yet inflation has persisted, mostly because of structural changes in the economy (e.g., no longer importing disinflation) rather than classic cyclical forces.
Now, China is once again exporting disinflation, in the form of Low-Cost Production; Overproduction; and Managed Production. These production distortions, when added to global markets, are forcing countries, including the U.S., to pass measures to protect local manufacturing and jobs, an effect of which is to lock in higher prices, the very thing the Fed is trying to push downward. The choice: either lower prices and control inflation through imports, or protect domestic production and jobs and sustain some higher prices.