More recently, the disinflationary tailwind in traded manufactured goods imported from China may have come to an end, at least for a period, as more of the increase in productivity there is captured in wage gains. Meanwhile, growing prosperity and urbanization in highly populous countries such as China and India has been the principal driver of a major, multiyear upward shift in the relative price of commodities. This move – a negative terms of trade hit for the United States – has pushed up the overall rate of inflation, at least temporarily. 6  BIS central bankers’ speeches  There are good reasons to believe that commodity prices will not continue to increase at the explosive rate of recent months. Households and businesses will adjust their activities in response to higher prices, and there will be a supply response to higher prices that will gradually build over time. In any event, a shift in relative prices, even if spread out over a number of years, should not to be confused with the onset of an ongoing inflation problem. But the uncertain future path of commodity prices does make the task of the central banker harder. It is the job of central bankers to ensure that changes in relative prices do not infect the general trend in prices. In the United States – unlike in many EMEs that are appropriately tightening policy – a large amount of slack and low unit labor cost increases provide a disinflationary counterbalance to commodity price gains.
These generally carry a higher yield than the assets purchased in the course of the intervention, typically low-yielding U.S. Treasuries. The difference in yields results in a net fiscal cost. 4  BIS central bankers’ speeches  Second, the need for U.S. fiscal consolidation implies that there will have to be offsetting increases in investment and the U.S. trade balance as the recovery proceeds. To illustrate this second point consider the following accounting identity: The public sector balance + the private sector balance = the current account balance Right now the identity holds as roughly: –10 percent of GDP public sector balance + 7 percent of GDP private sector balance = –3 percent of GDP current account balance.5 If the public sector balance must over time move from around –10 percent to around –3 percent to stabilize the federal debt-to-GDP ratio at tolerable levels, then the private sector balance and the current account balance must move by roughly 7 percentage points of GDP to take up the slack. Assuming that the consumption share of GDP still needs to fall over the medium term, the adjustment in the U.S. private balance will have to occur primarily in terms of rising residential or business fixed investment. There does seem to be room for business investment to expand significantly when firms become more confident in the economic outlook, provided that the United States remains a competitive location for investment. But residential investment is unlikely to climb very much for some time given the chronic overhang of unsold homes.