CNN on Inflation in China
In CNN’s recent story, China’s Booming Food Prices, John Vause, CNN’s Beijing Correspondent, looked at inflation in China from the point of view of the man on the street, and concluded that inflation in China would likely lead to higher wages, higher costs of manufactured goods, and ultimately higher prices for American consumers. In his words: “The China Price, as it’s been deemed, is going up. The only question is by how much.”
As part of the CNN piece, I took John to one of our facilities near Beijing; gave him a tour of the factory; and introduced him to our general manager and one of our line supervisors. The CNN crew even followed our line supervisor to his home and interviewed him there to see how inflation was affecting his family and daily life.
As part of my interview, I told John that, due to the large increases in raw material prices that have occurred over the last several years and the inability of manufacturers to pass along these higher costs to customers, manufacturers in China have taken it on the chin and profit margins have suffered. With profit margins now at reduced levels, there is no choice today but to pass along any further raw material price increases, or any wage increases due to inflation, on to consumers.
My comments to John reflected thoughts that I expressed in “Inflation: The End to China’s Cost/Price Squeeze.” Over the past ten years, as China has evolved into the world’s “workshop,” the manufacture of many products has shifted from high labor cost countries to low cost countries like China. This shift in manufacturing location has resulted in a significant, one-time drop in the prices of virtually all manufactured products, and is one of the reasons why inflation around the world has been such a non-issue, until recently that is. That is why analysts say that China has been a deflationary force in global economics.
Once prices are taken down to levels which reflect the lower costs of manufacturing, however, there are no further price decreases to be had, unless costs go down. But, that is not what is happening. Since 2004, the prices of nearly all raw materials have increased drastically, many doubling or tripling in price, and now, wage costs are threatening to increase due to higher living costs for workers. Since competitive pressures have not allowed manufacturers to pass along many of these costs to customers, profit margins have suffered, and there is no room for prices to go anywhere but up.
That is my point and that of CNN. In case you missed the broadcast, click here to view CNN’s “China’s Booming Food Prices.”
