Wages are rising in China, heralding the possible end of an era of cheap goods.
For the past 30 years, customers would ask William Fung, the managing director of one of the world's biggest manufacturing-outsourcing companies, to make his products—whether T-shirts, jeans or dishes—cheaper. Thanks to China's seemingly limitless labor force, he usually could.
Now, the head of Li & Fung Ltd. says the times are changing. Wages for the tens of thousands of workers his Hong Kong-based firm indirectly employs are surging: He predicts overall, China's wages will increase 80% over the next five years. That means prices for Li & Fung's goods will have to rise, too.
"What we will have for the next 30 years is inflation," Mr. Fung said. "A lot of Western managers have never coped with inflation."
The issue is likely to hover behind talks Monday, between Chinese and U.S. leaders in Washington at their annual Strategic Economic Dialogue. Currency and debt issues are expected to dominate the agenda. But there are signs that the low labor costs—and cheap currency—that led to China's huge trade surplus with the U.S. could be reaching a tipping point. This comes amid pressure from rising wages as China's working-age population begins to decline.
For decades, plentiful Chinese labor kept down costs of a range of goods bought by Americans. Even as politicians in Washington accused China of hollowing out the American manufacturing sector, cheap DVD players, sweaters and barbecue sets were a silver lining for consumers who grew accustomed to ever-lower prices. China also kept down the value of its currency, giving domestic exporters a competitive edge.
"Inflation has been damped pretty dramatically in the U.S. because it exported work to China and other places at 20% or 30% of the cost," said Hal Sirkin, a consultant at Boston Consulting Group. The years of dramatic reductions in costs are over, the firm says....MOREThe headline was in response to Krugman's May 8 post "The Inflation Monster Under the Bed":
I’m glad to see Greg Mankiw agreeing with me on the absence of any inflation risk in the current environment. Maybe he should have a word with everyone else in his party.
Here’s another way to think about the issue. As you can see above, wages have gone nowhere. Commodity prices, on the other hand, have gone up a lot lately (although they crashed last week).
So here are a couple of questions.
First, do you see any sign that workers are about to (or are even able to) demand higher wages to compensate for the higher prices of gas and food?
Second, do you any sign that employers are getting ready to make more generous wage offers?
Third, have you heard anything about companies feeling that they have room to raise prices by substantially more than the rise in their raw material costs?
The answer to all three questions is clearly no. So what we have is a rise in raw material prices, which will largely get passed on the consumers, but no hint that this is spreading into a wider rise in prices; and with labor costs flat, that means we get a one-time jump in consumer prices, but no persistent rise in inflation....MORE