China's Inflation is the World's Inflation
Currently, most of the world’s factories are located in China, because China has one of the lowest minimum wages for factory workers and has an almost infinite supply of workers willing to work for these low wages. As a result, China probably has the lowest costs of production compared to anywhere else.
As a result, more people throughout the world are able to afford purchasing much more than ever before, including people in China. This increase in the number of worldwide consumers and increase in goods sold has increased demand for all basic resources, commodities, and oil, thus steadily increasing the prices of these resources, commodities, and oil. As a result, the cost of production has also started to increase the prices of the final goods produced from these factories. Basically, this is the textbook definition of inflation when demand increases and supply decreases, thus the cost of living increases too.
Unfortunately, there are two primary issues with China’s inflation.
The first problem is that China’s inflation is not increasing gradually. For example China’s estimated annual inflation rate was between 5.6 to 6.5% so far this year (2007). Furthermore, the Chinese inflation rate appears to be increasing, maybe even exponentially increasing. For instance, it is not uncommon for some Chinese workers to receive a 20% salary increase in a single year just to compensate for the increases in the cost of living.
The second problem with China’s inflation is that it does not affect just China. Since there are very few alternatives to Chinese factories and labor, companies (such as Wal-Mart) will unlikely be able to outsource these factories again (from China to a cheaper country) to further reduce or stabilize costs. Therefore, the worldwide costs of manufactured goods from China will roughly increase at the same rate as the Chinese inflation rate. And since China is the world’s factory, the global inflation rate is directly coupled with the Chinese inflation rate.
As a result of China’s high inflation rate greatly influencing the world’s global inflation rate, then the world’s inflation rate is destined to also be very high. As an investor and consumer, are you prepared for this future?
by Phil for Humanity