Thursday, March 15, 2012

Import Prices To Rise

History is said to repeat itself, but a better description would be to say it 'rhymes" In the 1970s America experienced a wage spiral that caused the cost of goods and services to soar. The inflation took hold in and formed a feed-back loop that was only broken when the then acting Federal Reserve Chairman Paul Volker to raise the interest rate into the teens, this slammed the economy into a wall bringing  about the a deep and painful recession  that finally crushed  inflation. Today the wage spiral is in China buy consumers in America are about to pay the price.

Over the last few decade China has grown to be the world’s largest manufacturing power, its output of televisions, smartphones, steel pipes and other consumer items surpassed America’s in 2010. China now accounts for a fifth of global manufacturing. Its factories have made so much, so cheaply that they have curbed inflation in many of its trading partners. But the era of cheap China may be drawing to a close.

Costs are soaring in China, starting in the coastal provinces where factories have historically clustered. Increases in land prices, environmental and safety regulations and taxes all play a part. The biggest factor, though, is labor. Recently an investment bank, released a survey of over 200 Hong Kong-based manufacturers operating in the Pearl River Delta. It found that wages have already risen by 10% this year. Foxconn, a Taiwanese contract manufacturer that makes Apple’s iPads (and much more besides) in Shenzhen, put up salaries by 16-25% last month.

For years companies in China have operated on razor thin margins while chasing growth. It’s not cheap like it used to be, and these cost will work through the system and eventually be passed on to consumers in the way of higher prices. This comes at a time when many Americans can least afford it, high unemployment and slow wage growth is a problem here at home. A weaker dollar would  make things even worse, but is quite possible, America has pumped trillions of dollars out into the world over the last several decades, this action has the potential to come home to roost.


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