China and Inflation Update

A lot of the concepts in macro-economics are relatively easy to define in broad, conceptual terms.  But when it comes to actually measuring them, things get very, very difficult.  Measurement requires precise, observable, countable definitions.  Inflation is one of the these concepts.  Conceptually it’s easy:  a general rise in all prices.  But it practice it’s very hard to measure.   Price indexes, even when done well with good input data are nothing but very rough guesstimates.  In emerging markets like China the data are even somewhat suspect.

One thing is clear though.  Inflation, a general rise in all prices, happens under similar circumstances to when a particular price increses.  In a particular single-product market, the price goes up if the demand keeps increasing beyond what the supply can produce.  A general rise in all prices then happens when the total or aggregate demand for goods grows or exceeds the ability of the society to produce (aggregate supply).  One way this happens is for aggregate demand to grow so much that one of the critical inputs to production hits capacity.  Usually, in more modern economies, this means full employment has been reached and there are no more workers to  be put to work producing more goods.  (another way it happens to suddenly restrict the supply of external oil to an economy, a la the 1970’s in the U.S.).   An early warning sign of that an economy is reaching full-capacity and cannot keep growing as fast is industrial wages.  When unemployment disappears and full employment is achieved, industrial workers become very valuable, scarce resources and the bidding begins (wage increases).

It appears that China may be reaching such a point.  We are starting to see significant increases in industrial worker wages. Or so it appears – we should always be careful about generalizations about an economy as large as China’s that produces weak and unreliable economic statistics.  If the great Chinese migration of rural agricultural population into new urban industrial workers is starting to run low on new workers, then the recent wage increases could be the early signs of significant inflation in China.  It will require policy changes.  Click to see more on what’s happening below the fold (thanks to Naked Capitalism): Continue reading