Published on the web by Business Report on July 30, 2007.

By Ethel Hazelhurst

Falling prices, still floating miraculously on a sea of inflationary impulses, appear in three categories of goods listed in Statistics SA's inflation report for last month.

Furniture prices fell 0.7 percent in the month and 1.8 percent in the 12 months to June. Clothing prices fell 0.5 percent in the month and 7 percent over 12 months and footwear prices were down 0.1 percent and 10.4 percent.

The reason: these goods are either imported from China or India or some other low-cost Asian country; or they have to compete with cheap imports.

Without the benefit of cheap imports, South Africa's inflation rate would be higher than it is - at 7 percent in June.

And interest rates would probably be higher too.

And without the intervention of the department of trade and industry's deputy director-general, Iqbal Sharma, the disinflationary effect of cheap Chinese imports would have been even greater.

Sharma slapped a two-year import quota on certain Chinese imports of clothing and textiles as from January.

It's a pity he had to dilute the "China effect", because there is evidence it's on its way out. Market forces are doing what shortsighted intervention can't achieve.

The UK newspaper, The Telegraph, reported recently that industrial wages on China's eastern seaboard have jumped 50 percent over two years, while salaries in Bangalore have risen so much that software companies are outsourcing back to Europe.

Economists are now starting to tell us that the era of importing disinflation from China is over.

We can expect that country to start exporting inflation, a development that will soon put an end to the competitive advantage Chinese goods enjoy in global markets.

The forces of supply and demand generally even things out, unless markets are dysfunctional.

Meanwhile, the shift poses an inflationary challenge.

The Chinese, who are becoming wealthier by the minute, are also expected to step up spending.

Traditionally, they have saved against an uncertain future. But as earnings increase, so does confidence - and with it expenditure.

So we can expect that Chinese consumers will soon be adding to demand pressures rather than adding to supply.

Fortunately, the latest news from the US is that consumers there are on the retreat. Bloomberg reported on Friday that "spending, which accounts for about 70 percent of the economy, slowed to a 1.3 percent annual pace in the second quarter, the weakest since the last three months of 2005, from 3.7 percent the previous three months".

The 3.4 percent annualised economic growth in that quarter was fuelled by, among other things, exports. "Factories ramped up production to fill orders from Europe and Asia that made up for a slowdown in consumer spending," Bloomberg reported.

That's useful because it means the US economy is depending less on its own consumers and more on consumers abroad - like the increasingly consumer-conscious Chinese.

That will achieve two related objectives: reduce the large US trade deficit and erode the large Chinese trade surplus, creating a more stable world.

What this means for South Africans is that the rand may bounce around less.