For more than a decade starting in the early 1990s, U.S. inflation declined as low-wage workers in China and other developing nations joined the global economy and produced a tide of cheap goods that washed onto U.S. shores.
The trend made American consumers feel better off and, by restraining the upward crawl of consumer prices, helped enable the Federal Reserve to fuel the U.S. economy with low interest rates.
That epoch appears to be over. Prices of imported goods are climbing, becoming a source of inflationary pressure. A wide variety of common products made abroad, from shoes to auto parts to jewelry, are landing on U.S. docks with higher price tags.
U.S. import prices, excluding oil, rose 8% over the past two years, a historic shift from their downward drift for two decades. The increase is bigger still when including oil, which is up on global demand and Mideast turmoil.
Though the pressures eased a bit in recent weeks as commodity prices retreated, they show signs of becoming a nagging presence as Chinese workers and others in emerging markets win higher wages and also become eager domestic consumers.
The shift is part of a broader change that is reshaping the U.S. economy and its place in the world, with attendant pain as well as benefits. For years, U.S. consumers feasted on cheap imported goods—cheap partly because the Chinese currency was kept undervalued. This bred large U.S. trade deficits.
Most economists agree the U.S. needs to consume fewer goods from abroad and ship out more American-made goods and services. The upward drift in the prices of imported goods is a mechanism that makes that happen.
Currencies play a role. Washington has long pushed China to let its yuan appreciate and to encourage domestic consumption, both of which it has done to varying extents. The yuan is up 28% against the dollar in six years. The weaker dollar helps U.S. exporters, but the stronger yuan and the higher costs within China from domestic demand press upward on the costs of things U.S. shoppers want.
These changes are particularly apparent in apparel and footwear. U.S. consumer prices for apparel fell for 13 of the past 17 years, according to Labor Department data. Now, retailers and manufacturers warn of plans to push up prices on Nike sneakers, Hanes underwear, Abercrombie & Fitch and Polo apparel, Ugg boots and other products when fall lines hit the racks.
The key factor is that cotton prices have surged, driven in part by demand from developing economies. Higher labor costs in Chinese factories, rising transportation costs and the more expensive yuan also are pressuring makers and retailers to push up their prices.
U.S. apparel prices rose 1% in the 12 months through May. The American Apparel and Footwear Association estimates prices for its goods will be up 4% to 6% in the fall from a year earlier.
"The days of watching our product drop in price relative to other retail products have ended," said the association's president, Kevin Burke.
Thus, apparel prices and the cost of other imported goods, rather than helping the Fed control inflation as in the past, could tend to restrain it as the central bank searches for ways to spur a lumbering post-bubble U.S. economy.
Because the economy is still weak, overall inflation is unlikely to surge as it did in the 1970s. Fed officials have been comfortable enough with inflation to hold short-term interest rates near zero. But they are hesitant to take new measures, in part because inflation has ticked up.
The "inflationary impulse" from abroad requires the Fed to be "more wary," Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an interview this month.
The U.S. consumer price index rose 3.6% in the year that ended in May—above the Fed's informal 2% target. This was largely because of gasoline, but pressure is building elsewhere too. Excluding volatile food and gas prices, the index was up 1.5% in May from a year ago, a pickup from increases of less than 1% last year.
"China's disinflationary forces are beginning to wane and more inflationary pressure is building," said Alan Greenspan, the former Fed chairman, who predicted such a shift in his 2007 autobiography. He said his successor, Ben Bernanke, is operating in a more challenging environment than Mr. Greenspan confronted in 19 years running the Fed.
The Chinese supply 78% of the footwear imported into the U.S.; 71% of the ties; 55% of the gloves; roughly 50% of dresses and baby clothing; and 90% of house slippers, according to Commerce Department data.
In contrast to the decades when a flow of Chinese workers from the countryside pushed factory labor costs down, China's workers now are demanding higher wages and better jobs.
They are also emerging as an army of consumers whose shopping puts upward pressure on prices globally. "I can afford even the nice things now," says Shi Yuhan, a 29-year-old telecommunications manager in International Business Machines Corp.'s Beijing office, where she makes more than $4,600 a month.
Ms. Shi hits pricey city shops nearly every week, spending $150 or more at a time. Her new outfits include sundresses from Spanish retailer Zara, a Burberry trench coat and Adidas sneakers with her English name, Rebecca, printed on them. Ms. Shi says she recently negotiated a 30% raise when a competitor tried to poach her, and her income is twice what it was four years ago.
Peter McGrath, a U.S. sourcing consultant for big companies, says Chinese demand is shaping global pricing dynamics.
He sits on the board of directors of Xiniya Fashions, a Chinese retailer with 1,400 shops. He says Chinese consumers pay up to $25 for polo shirts at Xiniya (pronounced Zenya), well above the $15 the same shirts sell for in the U.S.
Even with rebates that Chinese manufacturers get for exporting, that $25 domestic price makes them less willing to accept the price cuts that used to be a standard part of their business, Mr. McGrath says: "They can make more money by selling it to the Chinese market."
