Posts Tagged ‘inflation’
Inflation Ahead?
[Adapted from my Morningstar contribution] A year ago this month, after a trip to China I wrote ominously about inflation hitting the US economy like a tsunami.
My opinion was based on two observations:
- China’s labor costs were galloping at a 20% to 30% clip per year, and so much of what we consume is produced in China now.
- The Fed was printing money like crazy.
So far I have been wrong. The February 2011 inflation rate was 2.11%; though a slight uptick from 1.63% in January, it was by no mean a tsunami. Recently, Fed Chairman Ben Bernanke testified before the Senate Banking Committee that the Fed projects an inflation rate of less than 2% for the next 3 years.
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When China runs out of cheap labor
Posted on: April 22, 2010
China has 1.3 billion people. In the last two decades, it is the source of seemingly limitless supplies of cheap labor to the world’s manufacturing industries. Believe it or not, this pool is about to run dry. When that happens, there will be huge implications for the world.
Even before my trip to China, I had read with incredulity that China’s exporting provinces are experiencing severe labor shortages requiring firms to raise wages 20%–30% just to keep the workers they have. My first stop in China was Shenzhen, a city that is home to Walmart’s worldwide procurement center. I stayed in the Evergreen Resort, a facility owned and operated by my friend Mr. Lin.
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Inflation is the silent killer of wealth. It does not have the “bark” of a full-blown financial crisis, but it certainly has the “bite.” Just imagine if the inflation rate is 4% over the next 10 years; within a decade you would lose nearly 40% of your wealth if you didn’t do anything about it.
Inflation over the next decade is highly probably because of two simple macro realities:
- America – from the federal government to the states down to individual households – is heavily in debt. The easiest way to get out of debt is to print money. There is a tremendous political incentive to do so.
- China, which has been the low-price setter for the past two decades, has seen labor costs galloping at a 20% to 30% annual clip lately (thanks to the one-child policy). Before long, that will translate into higher prices at your local Walmart.
The Investment Scientist 