Treasury Secretary Janet Yellen’s “mystery” may be moving toward resolution.

When she led the Federal Reserve, Yellen puzzled over inflation’s failure to fire despite low unemployment, years of shallow interest rates and several rounds of quantitative easing.

Claudio Borio, a top official at the Bank for International Settlements, likened the situation to peering through a looking glass: Central banks that once strove to quash inflation subsequently found themselves trying to lift it. Both he and Mark Carney, then governor of the Bank of England, also spent some time sleuthing.

At least part of the answer, they thought, lay in the globalization of labor markets. It no longer mattered much what the factory next door paid workers or charged for their products; the key was what the competitor or supplier on the other side of the world was doing.

When people like Borio and Carney spoke about the entry of more than a billion workers into the labor force since the Cold War, they were essentially talking about China. The country’s economy had become so big, so great an exporter, and so huge a manufacturer that it held prices down from Sydney to Seattle. China became a powerful disinflationary current in the global economy.

That force is now dissipating. China’s labor market is shrinking, according to the latest census. Beijing is endeavoring to boost its population and said Monday it will further relax restrictions on family size, allowing couples to have three kids.

Domestic inflation is picking up and there are signs that companies are absorbing high raw material costs rather than passing them along to customers, the kind of pressure Western firms grappled with when dealing with low-cost competitors in Asia.

Officials are also tying themselves in knots over how to deal with an appreciating currency. A stronger yuan would tend to counter inflation, but the central bank is reluctant to allow too much of an advance too soon, for fear of creating asset bubbles.

China’s factory-gate prices jumped 6.8% in April from a year earlier, the biggest gain in more than three years. Consumer prices rose 0.9%, a touch less than anticipated, but the largest increase since September. Beijing insists the impact of commodity prices on the domestic economy will be limited and that price growth remains manageable. Still, officials have pledged to strengthen controls on the raw-materials market to curb costs to companies.

Policy makers are right to be concerned. Firms aren’t passing along the full impact of price increases and some profit margins are being squeezed, according to Bloomberg Economics’ David Qu. “If commodity prices start to cool, the cycle could pass without China transmitting the full impact of higher input costs to the rest of the world,” he wrote recently. “If the boom persists, the shock absorber could break.”

In some ways, the concerns of Chinese officials are similar to those at the Fed, European Central Bank and the BOE. They are trying to look through recent moves and determine how much reflects a natural rebound from the slide in activity wrought by the COVID-19 pandemic.

Last year was the worst for the global economy since the 1930s, and while China recovered faster than the other major players, its contraction in the first three months of 2020 was the first in decades.

The Fed says much of the jump in inflation is likely to be “transitory,” an opinion echoed by leaders of many central banks. If they are wrong, interest rates may have to be jacked up faster than anticipated, roiling markets and potentially retarding the recovery. At the People’s Bank of China, officials are leery of overheating and exacerbating financial imbalances, yet probably recognize that economic growth will slow after reaching about 8% this year.

The central bank is also chastened by experience after the global financial crisis, when Beijing spent lavishly on public works. The stimulus helped steady growth at home and abroad, but left an overhang of debt that firms contended with for years.

China is no longer easily caricatured as a place with a limitless supply of cheap labor churning out bargain-basement stuff for consumers and businesses around the world. Does this mean inflation is about to seriously take off and scale the economy-threatening heights of the late 1970s? Unlikely. But it’s no longer an insane proposition, either.

When current Fed chair Jerome Powell — or the person who succeeds him — maps out the path to higher interest rates, he may not find himself struggling with the same whodunit as Yellen. And for those companies in the American Midwest or northern England that complained for years about being undercut by China, the idea that Beijing finds itself contending with climbing costs and rust belts of its own might be met with some degree of schadenfreude.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies.

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