TheThreat of Inflation

The following excerpt from a New York Times article discusses the possibility that China will be the source of inflation. If this happens low rates will no longer be an option.
The cost of doing business in China is going up.
Coastal factories are raising salaries, local governments are hiking minimum wage standards and if China allows its currency, the renminbi, to appreciate against the U.S. dollar later this year, as many economists are predicting, the cost of manufacturing in China will almost certainly rise. 
...
The shift was dramatized Sunday, when Foxconn Technology, one of the world’s largest contract electronics manufacturers and the maker of everything from the Apple iPhone to Dell computer parts, said that within three months it would double the salaries of many of its assembly line workers. ...

Last week, the Japanese auto maker Honda said it had agreed to give about 1,900 workers at one of its plants in southern China raises of between 24 percent and 32 percent in the hopes of ending a two week-long strike, according to people briefed on the agreement.
The changes are coming about because of the growing clout of workers in China’s sizzling economy, analysts say, and because soaring food and housing prices are eroding the spending power of migrant workers.

8 comments:

PJ said...

Inflation in China is a reality, as are shortages of many commodities and parts.

However, I don't see the connection to US interest rates. Inflation in China is going to produce a devaluation of the yuan vs the dollar. We'll continue to have deflation and low rates.

We've tried fiscal stimulus, China has tried monetary stimulus. One fails via deflation, the other via inflation. Both however will fail to stop negative real growth as the global deleveraging gathers force.

Tsachy Mishal said...

The lack of inflation has allowed us to keep rates low. Low inflation has largely been due to the ability to import Chinese goods at lower prices. Chinese imports rising in price could cause our inflation rates to rise.

Anonymous said...

We didn't get the gap lower I thought we might, based on last nights futures. There should have been a continuation move lower from Fridays ugly down day and jobs report. I'm expecting the market to turn negative and be down at least 1-2% before a bounce.

PJ said...

China can't raise prices in dollars or it will lose its exports entirely - manufacturing will move back to the US, or to Vietnam or India or Indonesia.

They are also getting crushed by the falling Euro. Their exports were exceedingly weak even while the dollar was weak, now they are collapsing.

China cannot raise prices of exported goods and they cannot tolerate a continuation of the dollar peg in a strong-dollar world. The resolution of higher yuan prices and lower export prices is a cheaper currency.

Tsachy Mishal said...

I also would have preferred a gap down. But we are being dragged around by Europe. The fact that they are so strong on the back of "bad news" from the G-20 says something. Sentiment here supports a bounce as well.

Tsachy Mishal said...

It is not so easy to move production out of China once costs are sunk even if labor gets a little more expensive. China is still cheaper than most countries at higher prices.

PJ said...

China is not that cheap any more - a Chinese official recently estimated margins on exported goods at 2%, and that's probably not far off. China is no longer the low-cost manufacturing venue, and there have been persistent problems with fraud and quality.

But the big problems is the inflation. The Chinese doubled their money supply in the last 18 months, vs 10% growth here. They now have "a tiger by the tail" in an old phrase of Hayek's.

Migration of industry out of China would be gradual, yes, but by the same token once gone it would never go back. To prevent that exodus, China will depreciate the yuan.

Anonymous said...

Annual inflation in India is now running at over 20%. Fortunately India is not as tightly coupled with the US as China is.