Notes: Figure shows year-over-year inflation from 31 March 1987 through to 30 September 2023, and hypothetical inflation, assuming that the globalisation driver neither added to nor subtracted from inflation during that period. The shaded area represents the difference between the two lines. A negative value indicates that realised inflation was lower because of the impact of the changes in globalisation. NAFTA stands for the North American Free Trade Agreement and WTO stands for the World Trade Organization.

Source: Vanguard, as at 11 June 2024. 

The chart covers 1987 through to late 2023, a period which included cycles of both accelerating and slowing globalisation. While globalisation helped contain inflation in the 1990s and 2000s, the magnitude of its impact was modest—far less significant than that of monetary policy. Even with the recent slowdown in globalisation—a trend we refer to as "slowbalisation"—its influence on inflation remains minimal. This is largely due to the structure of the US economy.

The US depends less on trade

The US economy is more self-sufficient than some may realise, with almost 90% of its goods and services produced within its borders - a much higher proportion compared with most other countries.

Take personal consumption as an example. By dollar value, only about 10% of goods and services consumed in the US are imported. While it might be surprising given the origins of many consumer goods like clothing and footwear, these imported nondurable goods constitute only around 4% of the US consumption basket.

With services such as healthcare, education and housing making up almost 70% of total US consumption and predominantly sourced domestically, the impact of globalisation on inflation has been limited. It’s why we expect slowbalisation to have a minimal impact on the US economy and inflation going forward.

Notes: The figure shows the composition of US personal consumption expenditures (PCE) by category (durable goods, nondurable goods and services) and by source (imported or domestic). We used data as at 31 January 2019, as disruptions from Covid-19 and its aftermath in the early 2020s caused consumption patterns to deviate significantly from the long-term trend.

Source: Vanguard calculations based on data as at 31 January 2019 from the San Francisco Federal Reserve Bank.

Economies adapt to changes in global trade

We should not underestimate the ability of countries to adapt. Since the 2008 global financial crisis, for instance, there has been a shift towards “nearshoring” or “friendshoring” - shifting trade to countries that are closer geographically or geopolitically to mitigate risks like supply chain disruptions. 

As a result, clothes labels in the US are more likely to say: “Made in Vietnam” or “Made in Mexico” instead of the once-ubiquitous “Made in China.” Long before the latest trade disputes and pandemic-related supply shocks, these shifts have helped alleviate inflationary pressures stemming from any one region.

Given these forces—a domestic production base, service-oriented consumption and adaptive trade strategies—we believe the US economy is well-positioned to adjust to shifting global trade dynamics. While globalisation has slowed, and it may continue to decelerate further, any resulting inflationary pressures in the US are expected to remain marginal.