Red-Hot Inflation Blows across the Pacific

Chinese inflation numbers just came out, and they’re sizzling: The consumer price index is up 6.5% in July year-on-year, and .5% from June. Producer prices are up an even hotter 7.5%. Those are the official numbers. But even officials admit that they understate actual inflation. Officially tolerated semi-official numbers are all in the double digits.

Anecdotal evidence suggests that labor costs are spiraling out of control. For example, Foxconn Technology Group, an electronics contract manufacturer, and one of the larger employers in China with 1.2 million employees, mostly assembly line workers—a number of whom committed suicide due to the insufferable working conditions—has announced that it would acquire one million robots. A novel strategy for the iPhone maker whose focus has been on manual labor. In its 2010 annual report, Foxconn disclosed that its labor cost shot up 16.5% company wide, though it had to double salaries in certain locations after waves of well-publicized suicides.

Other manufacturers too have complained about significant wage and input inflation, and they’re trying, apparently with some success, to pass them on to their customers, such as, you guessed it, Walmart.

Clearly, the money that the world’s central banks, and particularly our Fed, have printed with such abandon over the last few years, is finding a home.

Unfortunately for us, these inflationary pressures are making their way into our supply chain, and some have already arrived on retail shelves; others should hit the shelves before the holidays. 

How the hard-pressed American consumer will react remains to be seen. Higher prices are colliding head-on with real wages that have been declining for a while, and workers—they’re the lucky ones—have seen their purchasing power erode. (Update 08/09: the Bureau of Labor Statistics reported this morning that second quarter real wages fell 2.1% from the first quarter … a big drop). Consumers have filled the hole by borrowing, which spiked in June by the largest amount since 2007, as the Federal Reserve reported last Friday. Concerns are bubbling up that this might not turn into a good scenario.

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