China’s May import data confirm a worrying pattern that we’ve seen anecdotally: Global inflation as reflected in raw materials prices is constraining China’s economy.

Over the past year a scissors opened between the price of iron ore, now more than double its March 2020 level, and the physical volume of iron ore imports. Imports of iron ore to China’s metal-hungry economy have fallen back to 2017 levels while the price China pays for iron ore hovered at the all-time record high.

Global inflation is seeping into China, which means that China will have to raise prices and push the inflation back onto the rest of the world (see “Inflation Dragon China,” June 3). And that isn’t good news for markets. It’s another unintended consequences of the spendthrift lunacy that has possessed Washington.

We haven’t seen this kind of scissors opening between price and import volume before. It isn’t just iron ore. The same pattern applies to copper ore imports.

Chinese demand used to set world raw materials prices. That’s why China’s physical import volume and the price of imports in past years moved in the same direction. In today’s inflationary environment 

China is a price taker rather than a price setter. That will create a positive feedback loop where higher raw materials prices force Chinese manufacturers to raise finished goods prices, creating inflation all along the supply chain.

Cracks are appearing in the Fed’s solid wall of denial about inflation. Treasury Secretary Janet Yellen, a former Fed Chair, rattled markets on Friday with an offhand comment that higher interest rates might be a good thing (she didn’t say for whom).

And on June 7 former New York Federal Reserve Bank President William Dudley warned that the Fed’s stance means “monetary policy will remain loose until overheating begins – and cooling things off will require the Fed to increase interest rates much faster and further than it would if it started raising rates sooner.”

They are afraid – very afraid. You should be, too.