Inflation across borders

Inflation was a hot button issue in China last year. The construction boom and the expanding middle class is stretching demand for oil, building materials like concrete and steel, precious metals and other commodities such as meat. And the Chinese renminbi is undervalued so imports are artificially more expensive. Pork prices jumped over 60% last year in China, for example, while eggs and dairy prices rose 15-30%.

There was a good overview of the causes of inflation in the developing world and its effects in an article in the New York Times. One of the ceramic factories in the town of Foshan, close to Guangzhou, that Bud and I visited, is cited as an example of a Chinese producer that has been forced to hike their prices to compensate for rising costs.

It is now inevitable that inflation in these countries would lead to higher wages and higher costs for manufacturing exported goods and eventually those higher costs would be reflected in the prices Americans. I saw an article on Reuters the other day interviewing working-class shoppers at a Wal-Mart and a Dominic’s supermarket in Chicago about the noticeable increases in food prices, so I am sure it is now a big issue in the U.S. So it’s hard on lower income Americans and even tougher for the poor in developing countries, who may spend a third or more their income on food. And it’s a challenge for governments in those countries their economic growth depends on their competitive advantage of cheap and abundant land, energy, and labor.