External deflation will be swamped by domestic inflation

Last week the markets were very much focused on the potential for a stalling Chinese economy to “export” deflationary pressure to the US, either via the direct impact of a weaker renminbi or through the indirect impact of weaker global commodity prices. The conventional wisdom is that deflationary pressure could force the Fed to delay its first interest rate hike beyond September. But it is important to remember that the US is a relatively closed service-based economy. What matters most is not the prices of imported goods or raw materials, but domestic labour pressures.